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Cash flow is the money left over after collecting rent and paying all expenses — mortgage, taxes, insurance, maintenance, vacancy, and HOA. Positive cash flow means the property puts money in your pocket each month. Negative cash flow (cash flow negative or alligator) means you must subsidize the property from other income. Most conservative investors target at least $100–$300/month positive cash flow per unit, though this varies widely by market.

Cap rate (capitalization rate) = Net Operating Income ÷ Purchase Price × 100. It measures the unlevered return a property generates relative to its value, excluding financing. Cap rate is useful for comparing properties apples-to-apples regardless of how much you put down. A higher cap rate generally indicates higher return but also higher risk or lower appreciation potential. Cap rates vary significantly by market: urban markets often see 3–5%; secondary and tertiary markets commonly show 6–9%+.

Cash-on-cash return = Annual Cash Flow ÷ Down Payment × 100. It measures the annual return on your actual cash invested (down payment). Unlike cap rate, it accounts for financing — a property with the same cap rate will have different cash-on-cash returns depending on loan terms and down payment. Most investors target 6–12%+ cash-on-cash return, though thresholds depend on risk tolerance and alternative investment benchmarks.

The 1% rule is a quick screening filter: monthly rent should equal at least 1% of the purchase price. A $300,000 property should rent for at least $3,000/month. Properties meeting the 1% rule are more likely to generate positive cash flow, though it is a rough heuristic and not a substitute for full analysis. In many high-cost markets (California, New York), properties rarely meet the 1% rule and investors rely on appreciation instead of cash flow.

Gross Rent Multiplier = Purchase Price ÷ Annual Gross Rent. Lower GRM means more rent relative to price (better value). A GRM of 8 means the property costs 8 times its annual rent. Unlike cap rate, GRM ignores expenses, so it is only useful for quick comparisons within a market where expense ratios are similar. Cap rate is a more rigorous metric for investment decisions.

NOI = Effective Gross Income − Operating Expenses. Operating expenses include property taxes, insurance, maintenance reserves, property management fees, and HOA — but NOT mortgage payments. NOI is a property-level metric that excludes financing, used to calculate cap rate and compare properties independently of how they are financed. Mortgage payments are factored in when calculating cash flow.

A common rule of thumb is to reserve 1% of the property value per year for maintenance and capital expenditures (roof, HVAC, appliances). For older properties, 1.5–2% is more conservative. This reserve covers routine repairs, vacancy preparation, and eventual large capital expenses. Skipping the maintenance reserve leads to underestimating true expenses and overstating cash flow — a common mistake for new landlords.

Holding rental property in an LLC provides liability protection but has tax implications. Single-member LLCs are disregarded entities — rental income and expenses still flow to your personal Schedule E (not Schedule C). Multi-member LLCs file a partnership return (Form 1065) with K-1s to members. Depreciation, mortgage interest, property taxes, insurance, and maintenance are all deductible regardless of LLC status. The LLC structure does not change your income tax on net rental income, but it affects self-employment tax rules and estate planning. Consult a CPA before transferring existing properties into an LLC, as this can trigger due-on-sale clauses.