Real Estate · 12 min
Rental Cash Flow and Cap Rates
Model a rental honestly: vacancy, maintenance and reserves included.
Rental cash flow is rent minus every real cost: mortgage, taxes, insurance, maintenance, management and vacancy. Skipping the last two is the most common modelling error.
Cap rate is net operating income divided by purchase price. It lets you compare properties without letting financing choices distort the picture.
Underwrite conservatively. A deal that only works in a perfect year is not a deal.
Key takeaways
- Always model vacancy and maintenance.
- Cap rate = net operating income ÷ price.
- Conservative assumptions protect the downside.
Knowledge check
Cap rate is calculated as which of these?
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