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Analyze the profitability of a rental property. Calculate the Cap Rate and Gross Yield to see if the investment meets the "1% Rule" for cashflow.
Step-by-step breakdown of the underlying equations.
⚠️ This property falls below the 1% Rule. You may need to rely on appreciation rather than monthly cashflow.
The Rental Yield & Cap Rate Calculator analyzes the profitability of an income-producing property. It calculates the capitalization rate (cap rate)—the industry-standard metric for comparing investment properties—along with gross yield and the "1% Rule" test.
Understanding these metrics helps you quickly evaluate whether a property will generate positive cash flow and how it compares to other investment opportunities.
Scenario: A duplex for sale at $350,000, renting for $2,500/month total, with $6,000 annual expenses.
Analysis: Cap rate is decent (6.86%), but it fails the 1% rule, suggesting it may struggle to cash flow with financing.
Remember: Cap rate excludes mortgage payments by design—it measures the property's return independent of your financing. Run a separate cash flow analysis for your specific loan terms.
Cap rates vary by market and property type. Generally: 4-6% is typical for A-class properties in prime locations, 6-8% for B-class suburban properties, and 8-12%+ for C-class or higher-risk investments. Higher cap rates mean higher returns but often higher risk or more management needed.
The 1% rule states that monthly rent should equal at least 1% of the purchase price. A $300,000 property should rent for $3,000/month minimum. This is a quick screening tool—properties meeting this threshold typically cash flow positive, though you should always run detailed numbers.
Cap rate measures property returns regardless of financing (as if you paid all cash). Cash-on-cash return measures return on your actual cash invested (down payment + closing costs). With leverage, your cash-on-cash return can be significantly higher than cap rate.
Include: property taxes, insurance, property management (8-10% of rent), maintenance reserves (5-10%), vacancy allowance (5-8%), HOA fees if applicable, utilities if landlord-paid, landscaping/snow removal. Do NOT include mortgage payments when calculating NOI or cap rate.
Two approaches: increase revenue (raise rents to market rate, add amenities, convert storage to rentable space) or decrease expenses (shop insurance, contest property taxes, take over management, improve energy efficiency). Even small changes compound significantly in cap rate.