Cap Rate & Cash Flow Guide

Cap rate measures a property's income-generating potential independent of financing. It's calculated by dividing Net Operating Income (NOI) by the purchase price. NOI = Gross Rental Income minus Operating Expenses (taxes, insurance, management, maintenance, vacancy). Cap rate allows apples-to-apples comparison of properties regardless of how they're financed.

Cash-on-cash return (CoC) measures actual annual cash flow relative to the cash you invested — the most practically relevant metric for leveraged investors. It accounts for financing costs where cap rate does not. A property with a 5% cap rate and a 7% mortgage rate may produce negative cash flow depending on down payment and expenses.

GRM is a quick screening tool: Purchase Price divided by Annual Gross Rent. It doesn't account for expenses but allows rapid comparison of properties before doing full underwriting. In Austin, GRMs on residential investment properties typically range from 15–22 depending on location and asset type.

Amateur investors frequently underestimate operating expenses. In Austin, realistic assumptions include: property taxes (1.8–2.5% annually), insurance, property management (8–12% of rent), vacancy allowance (5–8%), and maintenance/capital expenditure reserves. Underestimating these turns a positive deal into a cash-flow drain.

Start with realistic rent estimates from comparable leases. Subtract 5–8% vacancy allowance. Subtract all operating expenses for NOI. Divide by purchase price for cap rate. Then layer in financing: calculate monthly debt service, subtract from monthly NOI for cash flow, and divide annual cash flow by your cash invested for CoC return.