The short answer
On a $350,000 rental financed with 20% down at 7% and renting for $2,500/month, this calculator finds a 5.14% cap rate but negative monthly cash flow of about -$362.85, a -6.22% cash-on-cash return, and a DSCR of 0.81. It fails the 1% rule too ($2,500 rent vs. the $3,500/month that rule calls for). That is a genuinely useful lesson: a respectable cap rate does not guarantee a property cash flows once real financing is factored in.
Key takeaways
- Cap rate (NOI ÷ price) ignores your mortgage entirely — 5.14% here — while cash-on-cash return accounts for financing and actual cash invested, which can be negative even when cap rate looks fine.
- DSCR below 1.0, like 0.81 in this example, means net operating income does not fully cover the mortgage payment — a threshold most investment-property lenders will flag.
- The 1% rule is a fast screening tool, not a valuation method: $2,500/month rent on a $350,000 purchase price falls short of the $3,500 the rule calls for.
- Even with negative early cash flow, equity can still build from principal paydown and appreciation — this example projects equity growing from $83,254.16 in year 1 to $141,584.40 by year 5.
Cap rate, cash flow, and DSCR explained
NOI = Effective gross income − operating expenses = $28,500 − $10,500 = $18,000/yr
Cap rate = NOI ÷ price = $18,000 ÷ $350,000 = 5.14%
Monthly cash flow = (effective income ÷ 12) − monthly expenses − mortgage = $2,375 − $875 − $1,862.85 = −$362.85/mo
DSCR = NOI ÷ annual debt service = $18,000 ÷ $22,354.20 = 0.81
Effective gross income here starts from $30,000/year in rent, reduced by a 5% vacancy allowance to $28,500. Operating expenses — property tax, insurance, maintenance, and property management — total $10,500/year, leaving $18,000 in NOI. Divided by the $350,000 purchase price, that is a 5.14% cap rate, which on its own looks like a reasonably ordinary residential rental.
But cap rate never looks at the mortgage. With 20% down ($70,000) and a 7% rate over 30 years, the mortgage payment on the $280,000 loan is $1,862.85/month — $22,354.20/year. NOI of $18,000 does not cover that, so DSCR comes in at 0.81, and monthly cash flow after all expenses and the mortgage lands around -$362.85. Cash-on-cash return, which divides annual cash flow by the $70,000 actually invested, works out to roughly -6.22%.
None of this means the deal is automatically bad — equity still accumulates from principal paydown and 3% assumed annual appreciation, reaching an estimated $141,584.40 by year 5 in this example. It does mean cap rate alone is not enough; check cash flow and DSCR before assuming a deal pencils out.
Rent vs. buy: a 10-year comparison
Using the calculator's Rent vs. Buy tab with a $350,000 home (20% down, 7% rate) against $2,000/month rent (3% annual rent growth, 7% investment return on the difference), buying comes out ahead by year 10:
| Metric | Year 10 |
|---|---|
| Buyer net worth (home equity) | $228,423.49 |
| Renter net worth (invested difference) | $197,948.99 |
| Advantage to buying | $30,474.50 |
The renter scenario assumes every month the cost of buying exceeds rent, that difference is invested at 7%. Because rent grows 3% a year while the mortgage payment stays fixed, buying's monthly cost advantage — and the renter's investable surplus — shrinks over time. Change the rent, appreciation, or investment-return assumptions and this comparison can flip either way, which is exactly why it is worth running with your own numbers rather than relying on a rule of thumb.
Related calculators
- Rent vs. Buy Calculator — a dedicated, deeper rent-vs-buy comparison tool.
- Rental Property Calculator — another angle on cash flow and returns for a rental.
- Mortgage Calculator — break down the monthly payment used in this analysis.