Rental real estate math breaks into three questions: does the rent cover the expenses (cap rate), how fast does your cash down payment earn itself back (cash-on-cash), and is this a decent deal at all (1% rule). A property that passes all three is worth a full underwrite. Fail any one and move on.
Worked example: $280,000 single-family rental, $56,000 down (20%), $224,000 loan at 7.5% for 30-year investor loan = $1,566/mo P&I. Expected rent $2,500/mo. Property tax $230/mo + insurance $95/mo + maintenance reserve 8% of rent ($200/mo) + vacancy reserve 5% ($125/mo) = $650/mo expenses. Net cash flow = $2,500 − $1,566 − $650 = $284/mo. Cap rate (NOI / price) = 7.9%. Cash-on-cash = $3,408 annual / $56,000 cash in = 6.1%.
The three rules
- 1% rule. Monthly rent ≥ 1% of purchase price. A $280K property needs $2,800/mo rent to pass. Rare in 2026 — most markets are 0.5-0.7%.
- Cap rate. Net operating income (rent minus expenses, before debt service) divided by purchase price. Target 6-8% for residential; 4-5% for Class A in major metros.
- Cash-on-cash return. Annual after-debt cash flow divided by total cash invested (down payment + closing + initial repairs). Target 8%+. Under 5% and you're better off in index funds.
Expense categories investors forget
- Vacancy — 5-8% of gross rent on average
- Maintenance and repairs — 8-15% of gross rent
- CapEx reserve — 5-10% for major replacements (roof, HVAC, appliances)
- Property management — 8-12% if you use a PM
- Tenant turnover — $500-$2,000 per turn
Investors who underwrite only rent minus mortgage are the ones who lose money for five years before realizing it.
Investment property financing rules
Investment property mortgages have stricter rules: 20-25% down minimum, 0.5-0.75% higher rates than owner-occupied, 6 months reserves required, no PMI available. Some investors use DSCR (debt service coverage ratio) loans that qualify off the property's cash flow instead of personal income — useful for portfolio investors, pricier than conventional.