Owning rental property can be a great way to earn additional money and diversify your streams of income. When analyzing properties it’s important to know whether you’re getting a good deal. There are many quick benchmarks to check such as the 1% rule, but the most straightforward way to determine a deal is to add up all the anticipated expenses and subtract from the anticipated monthly rent to make sure there’s positive cash flow. Besides cash flow, other numbers to consider are the cap rate and cash on cash return.
The cap rate is the property’s annual net operating income divided by the current market value of the property. This may be the same or similar to the purchase price. It can be a good quick way to compare the relative value of similar properties. According to the folks at BiggerPockets, a decent cap rate is at least 6%. However, this can vary greatly across types of properties and markets.
Cash on cash return is a measurement of the annual return or yield on an investment property. This metric compares the amount of actual cash invested with the amount of return generated over the first year. This is determined by taking the net annual income divided by the total amount invested in the property. This includes the down payment, closing costs, and initial repairs. Check out the rental property calculator below to determine monthly net cash flow, cap rate, and cash on cash return.
