Question 1

What is cap rate and how is it calculated?

Accepted Answer

Cap rate (capitalization rate) is calculated by dividing Net Operating Income (NOI) by the property purchase price. For example, a property with $18,000 NOI and a $200,000 purchase price has a 9% cap rate. Generally, 5-10% is considered a healthy cap rate for residential rentals, though market context matters significantly.

Question 2

What is cash-on-cash return for a rental property?

Accepted Answer

Cash-on-cash return measures annual pre-tax cash flow divided by total cash invested. Unlike cap rate, it accounts for your financing terms. A property with $3,600 annual cash flow and $45,000 cash invested has an 8% cash-on-cash return.

Question 3

What is a good DSCR ratio for a rental property?

Accepted Answer

Most DSCR lenders require a minimum ratio of 1.0x to 1.25x — meaning the property earns at least $1.00 to $1.25 for every $1.00 of mortgage payment. A DSCR above 1.25x is considered strong for refinancing or new DSCR loan qualification.

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