🏠 Real Estate · Lesson 5 of 8 · 9 min

Rental Property Math: Does the Deal Work?

🔢 Every landlord who went broke had a reason why the deal 'made sense.' Every landlord who built wealth ran the actual numbers. The 1% Rule and cap rate exist so feelings don't ruin your finances.

💡 Key idea

1% Rule: monthly rent ≥ 1% of price. Cap Rate = NOI ÷ Value × 100.

🧠 Why it matters

Two quick filters: The 1% Rule (monthly rent ≥ 1% of purchase price) and Cap Rate (annual net income ÷ property value × 100). Cap rates of 5-10% are generally healthy depending on market. Run these before touring — numbers first, emotions second.

🌍 In the real world

🏠 Property costs $200,000. Monthly rent: $1,800. 1% of $200k = $2,000 — fails the 1% Rule. Annual rent $21,600, expenses $9,000 = NOI $12,600. Cap rate = 6.3% — respectable on its own, but it fails the 1% Rule, so expect thin cash flow once a mortgage is involved. The numbers tell you the truth before emotions do.

📌 Takeaways

1% Rule: quick filter for cash flow potential
Cap Rate = NOI ÷ price × 100
Run numbers before falling in love with a property

📖 Terms in this lesson

Cap rate: A rental property's yearly net income divided by its price; a quick way to compare deals.

✅ Test yourself

A $300k property rents for $2,500/mo. Does it pass the 1% Rule?

Yes — $2,500 ≥ $3,000
No — $2,500 < $3,000 (1% of $300k)
Yes — close enough
The 1% Rule only applies to apartments

Answer: B · No — $2,500 < $3,000 (1% of $300k)

1% of $300,000 = $3,000/month. $2,500 rent fails. It doesn't mean it's a bad deal — but it means the cash flow will be tight.

What does 'cap rate' measure?

The maximum mortgage payment
Annual net income as a % of property value
How fast a property appreciates
Monthly cash flow before expenses

Answer: B · Annual net income as a % of property value

Cap Rate = (Annual Net Operating Income ÷ Property Value) × 100. A 7% cap rate means you'd earn 7% yearly on an all-cash purchase.

Why run property numbers BEFORE touring?

It's optional — most deals work out
To avoid emotional decisions on deals that can't cash flow
The bank requires it
Numbers change after you tour

Answer: B · To avoid emotional decisions on deals that can't cash flow

Falling in love with a property clouds judgment. Numbers first — only tour deals that mathematically work. Emotions belong after the math.

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