How to Tell If a Rental Property Is Actually Worth It
A property's price tag tells you nothing about whether it will make money. Three numbers do: the 1% rule (a quick screen), the cap rate (how the deal yields), and cash-on-cash return (what your actual invested cash earns). Run all three, look at real monthly cash flow after every cost, and you'll know whether a rental pays you — or quietly costs you — before you sign.
1. The 1% rule — a 10-second screen
The 1% rule says a property's monthly rent should be at least 1% of its purchase price. A $250,000 house should rent for about $2,500/month to clear the bar. If it rents for a lot less, the deal usually won't cash-flow and probably isn't worth deeper analysis. It's a rough first filter, not a verdict — and in expensive coastal markets almost nothing passes it, which is itself useful information.
2. Cap rate — how the deal yields
Cap rate is the property's net operating income (NOI) — rent minus all operating costs, before the mortgage — divided by its price. A good cap rate is generally 5–10% depending on the market and risk: roughly 4–6% in stable urban areas, 6–8% in mid-tier cities and suburbs, and 8–10%+ in higher-risk areas. Use cap rate to compare deals on an apples-to-apples basis, independent of how you finance them.
3. Cash-on-cash return — what your money earns
Cash-on-cash return is your annual pre-tax cash flow divided by the actual cash you put in (down payment, closing costs, initial repairs). It's the best measure for a financed purchase because it reflects your money, not the whole property's. A broadly healthy cash-on-cash return is 8–12%+.
Then look at real monthly cash flow
All three ratios come down to one thing: does rent cover every cost with money left over? Real cash flow is rent minus all of it — mortgage principal and interest, property tax, insurance, maintenance, a vacancy allowance, and management (count it even if you self-manage; your time has value). Positive cash flow means the property pays you each month. Negative means you're feeding it.
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Open the free calculator →An honest caveat about expensive markets
In high-cost markets these numbers often read poorly — negative cash flow, a 1–2% cap rate. That doesn't always mean 'no,' but it means you're betting on appreciation and paying to hold the property in the meantime, rather than earning income now. Know which game you're playing before you buy, and don't count hoped-for appreciation as if it were monthly income.
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Frequently asked questions
What is the 1% rule for rental property?
The 1% rule says a property's monthly rent should be at least 1% of its purchase price — about $2,000/month on a $200,000 home. It's a quick screen: if rent falls well short, the deal usually won't cash-flow. It's a filter, not a final answer, and rarely holds in expensive markets.
What is a good cap rate for a rental?
Generally 5–10%, depending on market and risk — roughly 4–6% in stable urban areas, 6–8% in suburbs and mid-tier cities, and 8–10%+ in higher-risk areas. Cap rate is net operating income divided by price, so it lets you compare deals regardless of financing.
How much cash flow should a rental property make?
There's no single number, but many investors want clearly positive monthly cash flow after every cost — including vacancy, maintenance, and management — and a cash-on-cash return of 8–12%+ on the cash they invested.
This guide is general information to help you evaluate a deal — not investment, tax, or financial advice. Figures depend on the numbers you enter and your local market; verify them and consult a professional for your situation.