How We Calculate Everything
Data Sources
All data comes from free, official US government sources:
- HUD Fair Market Rents — Expected rent by bedroom count for every zip code and metro area. Updated annually.
- Census / American Community Survey — Median home values by county/zip, vacancy rates, median household income.
- FRED (Federal Reserve Economic Data) — Current 30-year fixed mortgage rates, updated weekly.
- FHFA House Price Index — Home price appreciation trends by metro/state.
- BLS — Employment and job growth data by metro area.
Formulas
Cap Rate
Cap Rate = (Annual Rent - Operating Expenses) / Home Price × 100 Operating Expenses = Property Tax + Insurance + Vacancy + Maintenance + Management
Cap rate measures the return on a property as if you paid all cash (no mortgage). It's the most common metric for comparing markets. Higher = better for cash flow investors.
Monthly Cash Flow
Cash Flow = Monthly Rent - Mortgage - Property Tax - Insurance - Vacancy - Maintenance - Management
The money left in your pocket each month after all expenses. Positive = the property pays for itself and generates income.
Cash-on-Cash Return
Cash-on-Cash = Annual Cash Flow / Total Cash Invested × 100 Total Cash Invested = Down Payment + Closing Costs
The percentage return on your actual out-of-pocket investment. Accounts for leverage (mortgage).
DSCR (Debt Service Coverage Ratio)
DSCR = Net Operating Income / Annual Debt Service Net Operating Income = Annual Rent - Operating Expenses (no mortgage) Annual Debt Service = Monthly Mortgage Payment × 12
Banks require DSCR ≥ 1.0 to approve DSCR loans. Above 1.25 is considered healthy.
Price-to-Rent Ratio
Price-to-Rent = Home Price / Annual Rent
Lower = better for landlords. Under 15 is considered investor-friendly. Above 20 means the market is expensive relative to rents.
1% Rule
1% Rule = Monthly Rent / Purchase Price × 100
If monthly rent is ≥ 1% of the purchase price, the property is likely to generate positive cash flow. A quick screening tool.
Default Assumptions
For pre-computed metrics on city and zip code pages, we use these industry-standard defaults:
| Parameter | Value |
|---|---|
| Mortgage Rate | 7.0% |
| Down Payment | 20% |
| Loan Term | 30 years |
| Property Tax Rate | 1.2% |
| Insurance Rate | 0.5% |
| Vacancy Rate | 8% |
| Maintenance/CapEx | 10% |
| Management Fee | 0% |
| Closing Costs | 3% |
You can override all of these in the interactive calculator.
Verdict System
| Cap Rate | Verdict |
|---|---|
| > 8% | 🟢 STRONG — excellent cash flow market |
| 6–8% | 🟢 GOOD — solid returns |
| 4–6% | 🟡 MODERATE — average returns |
| 2–4% | 🔴 WEAK — appreciation play only |
| < 2% | 🔴 POOR — negative cash flow likely |
Limitations
- HUD Fair Market Rents are estimates, not actual market rents. Actual rents may be higher or lower.
- Census median home values are based on owner-reported estimates from surveys.
- We use a single property tax rate; actual rates vary significantly by county and jurisdiction.
- These are market-level averages. Individual properties will vary based on condition, location within zip code, etc.
- This is not financial advice. Always perform your own due diligence before investing.
Update Frequency
Data is refreshed annually when HUD releases new Fair Market Rent data (typically October). Mortgage rates are updated from FRED more frequently.