Frequently asked questions
What is a good cap rate for a rental property?
Cap rates vary by location and property type. In major cities, 4 to 6% is typical for residential. In smaller markets, 7 to 10%+ is achievable. A higher cap rate means more income relative to price but often comes with more risk, worse neighborhoods, or deferred maintenance. Compare cap rates within the same market and property class.
What is the difference between cap rate and cash-on-cash return?
Cap rate measures the property's return regardless of financing (NOI divided by purchase price). Cash-on-cash measures the return on your actual cash invested (annual cash flow after debt service divided by total cash invested). Leverage can make cash-on-cash higher than the cap rate when mortgage rates are below the cap rate.
What is DSCR and why does it matter?
DSCR (Debt Service Coverage Ratio) is NOI divided by annual mortgage payments. A DSCR of 1.0 means you break even. Below 1.0 means negative cash flow. Lenders typically require DSCR of 1.2 to 1.25+ for investment property loans. Higher DSCR means more cushion if rents drop or expenses rise.
Why does cash flow jump after the mortgage is paid off?
Once the mortgage is paid off, you no longer have annual debt service payments. Your annual income becomes NOI (rent minus operating expenses only). For a typical property, this can mean cash flow increasing 3 to 5 times compared to when the mortgage was active.
What vacancy rate should I assume?
5% is optimistic for a desirable area with strong rental demand. 8 to 10% is more conservative and accounts for turnover costs between tenants. In student housing or seasonal markets, budget 15 to 20%. Always add a buffer above local vacancy statistics for unexpected situations.
Should I self-manage or hire a property manager?
Property managers typically charge 8 to 12% of collected rent. Self-managing saves that cost but requires your time for tenant calls, maintenance coordination, rent collection, and legal compliance. For out-of-area investors or those with multiple properties, management is usually worth the cost.
What does the chart show?
The chart shows two lines over 30 years: property value (rising with appreciation) and mortgage balance (declining to zero). The gap between them is your equity. You can see equity growing from both appreciation and principal paydown, and the moment the mortgage hits zero.