The three numbers that actually decide a rental
Most rental decisions come down to three figures. Everything else is supporting detail.
Cash flow is what is left after the rent pays the mortgage, taxes, insurance, management, maintenance, and vacancy. It is the number that keeps you solvent in a slow month, so it should be positive on realistic assumptions, not best-case ones.
Cap rate is net operating income divided by price, and it lets you compare properties independent of financing. Cash-on-cash return divides your annual cash flow by the actual cash you put in, which is the number that tells you how hard your down payment is working.
- Cash flow: the monthly cushion after every operating cost and the debt.
- Cap rate: income yield on price, useful for comparing deals.
- Cash-on-cash: return on the money you actually invested.
The 1% and 50% rules — and where they mislead you
Quick rules are for triage, not for the final decision. They exist to help you kill bad leads fast.
The 1% rule says monthly rent should be at least 1% of the purchase price. It is a fast filter, but it says nothing about taxes, insurance, or condition, so a property can clear 1% and still bleed cash in a high-tax or high-insurance market.
The 50% rule assumes operating expenses will eat roughly half of rent before the mortgage. That is a useful gut check in many markets, but newer or well-maintained properties can run leaner, and older stock or heavy-turnover units can run much worse.
Use rules to screen, not to buy
A property that passes the 1% rule has earned a full underwrite, not an offer. Once a lead survives the quick filter, run the real numbers before you commit capital.
The expenses new landlords forget
Deals rarely fail on the obvious costs. They fail on the ones that are easy to leave out of a napkin calculation.
Vacancy, capital expenditures, and property management are the three most commonly omitted line items. Even if you self-manage, price in management, because your time has a cost and your plans can change.
Capital expenditures — roof, HVAC, water heater, turnovers — do not hit every month, but they are real and lumpy. Reserving for them monthly is what separates a rental that survives a bad year from one that forces a distressed sale.
- Vacancy: budget for empty months, not 100% occupancy.
- CapEx reserves: set aside for big-ticket replacements.
- Management: price it in even if you self-manage today.
Going from a quick screen to a real decision
The workflow that keeps you out of trouble is filter first, underwrite second, offer third.
Start with rent versus price to decide whether a property is worth your attention. If it clears the bar, pull a defensible rent estimate from comparable rentals rather than the listing agent’s optimistic number.
Then layer in every operating cost, your financing, and honest reserves. If the cash flow and cash-on-cash still work on conservative inputs, you have a deal worth pursuing — not just a listing that looked good at a glance.