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. Higher cap rate means more income relative to price but often comes with more risk or deferred maintenance.
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 price). Cash-on-cash measures your return on actual cash invested (cash flow after debt service divided by total cash in). Leverage can make cash-on-cash higher than cap rate when mortgage rates are below the cap rate.
Should I buy with cash or get a loan?
Cash purchases eliminate mortgage payments and produce immediate strong cash flow. Financing uses leverage — you control a larger asset with less capital, potentially producing higher cash-on-cash returns. The trade-off is risk: leverage amplifies both gains and losses. Compare the cash-on-cash return with each approach.
Why does cash flow jump after the mortgage is paid off?
Once the mortgage is paid off, your 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. This is the long-term wealth-building power of rental properties.
What vacancy rate should I assume?
5% is optimistic for a desirable area with strong demand. 8 to 10% is more conservative and accounts for turnover costs. In student housing or seasonal markets, budget 15 to 20%. Always check local vacancy statistics and add a buffer.
How do repairs affect my return?
Repair costs increase your total cash invested, which lowers cash-on-cash return in year one. However, repairs can increase the property's rent potential and market value. A good rehab pays for itself within 2 to 3 years through higher rent or reduced maintenance.