Cap Rate vs. Cash-on-Cash vs. DSCR: A Worked Rental Example

Short on time? The Rental Deal Analyzer ($15) is the finished, tested version of what this tutorial builds.

Three ratios come up in every rental conversation, and they answer three different questions:

All three start from NOI, net operating income: what the property earns after operating expenses but before the mortgage.

The example property

A single-family rental listed at $250,000:

• Rent $2,100/month. Vacancy allowance 5%.
• Taxes $3,000/yr and insurance $1,400/yr.
• Repairs 5% and CapEx reserve 5% of rent. Property management 8% of collected rent.
• 25% down, 7% interest, 30 years. Closing costs $6,000, and $4,000 of repairs up front.

Step 1: NOI

• Gross scheduled rent: $2,100 × 12 = $25,200
• Vacancy (5%): −$1,260, so effective gross income = $23,940
• Operating expenses:
• taxes + insurance = $4,400
• repairs + CapEx (10% of $25,200) = $2,520
• management (8% of $23,940) = $1,915.20
• total $8,835.20
• NOI = $23,940 − $8,835.20 = $15,104.80

Step 2: Cap rate

$15,104.80 ÷ $250,000 = 6.04%. That's respectable for many markets. If you stopped here, you'd think it's a fine deal.

Step 3: The loan

• Loan = 75% of $250,000 = $187,500.
• At 7% for 30 years the payment is $1,247.44/month, or $14,969.31/year of debt service.

Step 4: Cash flow and cash-on-cash

• Annual cash flow = $15,104.80 − $14,969.31 = $135.49, about $11/month.
• Cash invested = $62,500 down + $6,000 closing + $4,000 repairs = $72,500.
• Cash-on-cash = $135.49 ÷ $72,500 = 0.19%.

Step 5: DSCR

$15,104.80 ÷ $14,969.31 = 1.01. Many lenders want 1.20–1.25 for investment loans. At 1.01, one bad month wipes out the year's cash flow.

What the three numbers are telling you

The property is fine (6% cap rate), but at 7% interest with 25% down, the financing eats almost all of the income. To make it work you'd need a lower price, higher rent, a bigger down payment or a cheaper loan. That's exactly what sensitivity tables are for.

Also check break-even occupancy: (operating expenses + debt service) ÷ gross rent = (8,835.20 + 14,969.31) ÷ 25,200 = 94.5%. If the house sits empty for more than about 20 days a year, you're paying to own it.

Try it with your own numbers

Use the free Rental Deal Calculator. It runs in your browser and nothing is sent anywhere.

For side-by-side comparison of three deals, a 10-year projection with IRR, and sensitivity tables, get the Rental Property Deal Analyzer. The calculator uses the same formulas and is tested against it.

Educational example, not financial advice.

Free tool: Free Rental Property Calculator: Cash Flow, Cap Rate, Cash-on-Cash, DSCR

Written with AI assistance. Every formula, command and number on this page was tested before publishing (see each section). Product links go to our store.