Cash Flow
The money remaining each month after ALL expenses including mortgage payment. Positive cash flow
= income exceeds expenses. This is actual money in your pocket.
Formula: Cash Flow = NOI - Mortgage Payment (P&I)
Net Operating Income (NOI)
Total rental income minus operating expenses, EXCLUDING mortgage payments. The foundation for
most real estate valuations and the numerator in cap rate calculations.
Formula: NOI = Effective Gross Income - Operating Expenses
Cash-on-Cash Return (CoC)
Annual pre-tax cash flow divided by total cash invested. Measures the return on your actual
out-of-pocket investment, accounting for leverage. The “yield” on your cash.
Formula: CoC = (Annual Cash Flow / Total Cash Invested) × 100
Cap Rate (Capitalization Rate)
Annual NOI divided by property price. Measures return assuming an all-cash purchase (no
mortgage). Used to compare properties regardless of financing.
Formula: Cap Rate = (Annual NOI / Purchase Price) × 100
Gross Scheduled Income (GSI)
The total potential rental income if the property is 100% occupied all year with no collection
losses. Also called Potential Gross Income (PGI).
Formula: GSI = Monthly Rent × 12
Effective Gross Income (EGI)
Gross scheduled income minus vacancy and credit losses, plus other income. This is the realistic
income you can expect to collect.
Formula: EGI = GSI - Vacancy Loss + Other Income
Operating Expense Ratio (OER)
Operating expenses divided by effective gross income. Industry average for residential rentals is
35-45%. Higher ratio = less profitable operations.
Formula: OER = (Operating Expenses / EGI) × 100
Break-Even Occupancy
The minimum occupancy rate needed to cover all expenses plus debt service. Below this, you’re
losing money. Lower is better—more cushion.
Formula: Break-Even = (OpEx + Debt Service) / GSI × 100
1% Rule
A quick screening rule: monthly rent should be at least 1% of the purchase price. Example: $300K
property should rent for $3,000+/month. Higher % = better cash flow potential.
Formula: 1% Rule = (Monthly Rent / Purchase Price) × 100
50% Rule
A rule of thumb: operating expenses (excluding mortgage) typically equal about 50% of gross rent.
Use this for quick estimates when detailed expenses aren’t available.
Formula: 50% Rule Check = Operating Expenses ≤ 50% of Rent
Gross Rent Multiplier (GRM)
Purchase price divided by annual gross rent. A quick screening tool—lower GRM = better value
relative to rent. Good GRM is typically under 12.
Formula: GRM = Purchase Price / Annual Gross Rent
CapEx (Capital Expenditures)
Reserve fund for major repairs and replacements that extend property life: roof, HVAC, water
heater, flooring, appliances. Smart investors set aside 5-10% of rent monthly.
Vacancy Rate
Percentage of time property sits vacant between tenants. Includes turnover time for cleaning,
repairs, marketing, and re-leasing. 5% ≈ 18 days/year; 8% ≈ 1 month/year.
Debt Service
The total mortgage payment amount (principal + interest). Does not include taxes or insurance
(those are operating expenses). This is what you owe the lender each period.
