What is a good cap rate?
It depends on the market: 4–5% is normal in high-cost coastal metros, 7–9% in the Midwest and South. Compare against local sold comps, not a national rule of thumb.
Analyse a rental deal in seconds: monthly cash flow, cap rate, cash-on-cash return and the debt service coverage ratio lenders underwrite to.
NOI = gross rent × (1 − vacancy) − operating expenses. Cap rate = NOI ÷ price. Cash-on-cash = (NOI − debt service) ÷ cash invested. DSCR = NOI ÷ annual debt service.
A $250,000 duplex renting for $2,400/month with $850 expenses and 5% vacancy gives an NOI of about $17,160 — a 6.9% cap rate. With $62,500 down and $1,240 monthly debt service, cash-on-cash is 3.6% and DSCR is 1.15.
It depends on the market: 4–5% is normal in high-cost coastal metros, 7–9% in the Midwest and South. Compare against local sold comps, not a national rule of thumb.
Most DSCR loan programmes want 1.20 or better, with the best pricing above 1.35. At exactly 1.00 the rent only just covers the mortgage, leaving no margin for a vacancy.
CapEx reserves (5–10% of rent), property management (8–10%), turnover costs and rising insurance. The 50% rule — assume half of gross rent goes to expenses excluding the mortgage — is a fast sanity check.