Cap Rate & Cash-on-Cash.

There is no universal “good” number — it depends on the market, the asset, and your risk tolerance. Many residential rental investors look for cap rates in the 5%–8% range, with lower rates accepted in strong, low-vacancy markets like Miami because the price already reflects high demand. A higher cap rate means more income per dollar of price, but it often signals more risk, more management, or a softer location.

Divide net operating income (NOI) by the purchase price. NOI is your effective rent (gross rent minus vacancy) minus all operating expenses — taxes, insurance, HOA, maintenance, management, and capex reserves — but it does not subtract your mortgage. For example, a property with $24,000 of NOI bought for $400,000 has a cap rate of 6% ($24,000 ÷ $400,000).

Cap rate ignores financing and measures the property’s yield as if paid in cash (NOI ÷ price). Cash-on-cash includes your loan and measures the cash flow you actually keep against the cash you invested (annual cash flow ÷ down payment + closing + rehab). Leverage can push cash-on-cash above the cap rate when the loan rate is below the cap rate.

NOI stands for net operating income: the income a property produces after operating expenses but before mortgage payments, income taxes, and depreciation. It is calculated as effective rent minus expenses like property tax, insurance, HOA, maintenance, management, and reserves. NOI is the engine of cap rate and the figure lenders scrutinize most.

DSCR (debt service coverage ratio) is NOI divided by annual debt service. Many rental lenders want a DSCR of at least 1.20–1.25, meaning the property earns 20%–25% more than its loan payments. A DSCR of 1.0 is break-even, and anything below 1.0 means the rental does not cover its own mortgage from operations.