Rental Property Quick Check: 1% Rule, GRM, Cap Rate, Cash-on-Cash and DSCR

A rental property quick check turns four numbers (price, rent, expenses, and the down payment and loan payment) into five ratios: rent ÷ price for the 1% rule, gross rent multiplier = price ÷ yearly rent, cap rate = yearly NOI ÷ price, cash on cash return = yearly cash flow ÷ down payment, DSCR = monthly NOI ÷ payment. A $320,000 house at $2,400 rent: 0.75%, 11.1, 5.4%, −2.4%, 0.90.

The 1% rule: rent to price

The 1% rule is the fastest screen there is: the monthly rent should be at least 1% of the purchase price. It is a rule of thumb from a time and from markets where it was easy to meet, and in many US markets today it is not.

Rent-to-price = Monthly rent ÷ Price
1% rule: rent-to-price ≥ 1%

On a $320,000 house, 1% is $3,200 a month. A rent of $2,400 is 0.75%. What the ratio is good for: sorting a long list of listings in seconds, and seeing at once that a house in an expensive area will need a large down payment to cash-flow. What it misses: everything on the expense side. Property taxes of 0.5% or 2.5% of value a year, an HOA, an old roof, a 15% vacancy in a slow market: the 1% rule cannot see any of them. Treat a pass as "look closer", not as "buy", and a fail as "will need more cash down", not as "no".

Gross rent multiplier (GRM)

GRM asks the same question as the 1% rule from the other side: how many years of gross rent does the house cost?

GRM = Price ÷ (Monthly rent × 12)

At $320,000 and $28,800 of yearly rent the GRM is 11.1. A 1% house has a GRM of 8.3; a 0.5% house, 16.7. Lower means cheaper relative to rent.

GRM is good for comparing houses in one neighborhood, where expenses are similar, and it is the ratio appraisers use when they value a rental by the income approach. It misses the same things as the 1% rule: no expenses, no loan, no condition. It is a price-per-rent figure, the rental equivalent of price per square foot.

Cap rate formula

The cap rate (capitalization rate) is the first ratio that looks at expenses. It is the house's yearly net income as a share of its price, as if you bought it with cash.

NOI = Rent − Operating expenses (vacancy, management, maintenance, reserves, taxes, insurance, HOA)
Cap rate = Yearly NOI ÷ Price

The operating expenses do not include the loan payment: that is the point. The cap rate measures the house, not the financing, so it is comparable between a cash buyer and a buyer with 20% down, and between two houses with different loans. On the example house, 40% of rent goes to expenses, NOI is $1,440 a month or $17,280 a year, and the cap rate is 5.4%.

What it is good for: comparing houses and comparing a house with the cost of borrowing. If the cap rate is below the loan's interest rate, borrowing lowers the return on your cash (negative leverage). What it misses: the loan, the rehab the house needs before it earns that rent, and the quality of the expense estimate. A cap rate built on "expenses are 40% of rent" is a sketch; a cap rate built on the tax bill, an insurance quote and a maintenance reserve for a house of that age is a figure.

The expense estimate is the weak point of every rental ratio. Forty to fifty percent of rent is a common rule of thumb for an older single-family house once vacancy, management, maintenance, reserves, taxes and insurance are counted; the BRRRR article shows them itemized, as the BRRRR reading of a deal in Flip Investor OS does. Costs vary by market, and a county with 2% property tax breaks any national rule of thumb.

Cash flow and cash-on-cash return

Cash flow is what is left each month after the expenses and the loan payment. Cash-on-cash return puts the yearly cash flow against the cash you put in.

Cash flow = Rent − Operating expenses − Loan payment
Cash-on-cash = Cash flow × 12 ÷ Down payment

It is the only one of the five ratios that depends on your financing. Put 25% down and the payment is one figure; put 40% down and it is another, with a bigger denominator. That makes cash-on-cash personal, which is its use and its weakness: it tells you what your money earns in this deal, and it tells you nothing about the house itself. A high cash-on-cash can mean a good house or a very small down payment on a loan that barely covers.

The quick check takes the down payment and the payment as you enter them; it does not size the loan. Use the payment from your lender's quote, or the standard amortization formula: on a $240,000 loan at 7% over 30 years it is $1,596.73 a month.

DSCR calculation

DSCR (debt service coverage ratio) is the lender's ratio: how many times the house's net income covers the loan payment.

DSCR = Monthly NOI ÷ Monthly loan payment

At 1.0 the rent after expenses exactly covers the payment and nothing is left. Below 1.0 you pay the difference every month. DSCR lenders, who underwrite the property instead of your tax returns, commonly look for about 1.2 or more at their best terms; the threshold is theirs and worth asking about before you count on a refinance.

DSCR is good for seeing how much room there is between the rent and the payment, and for knowing what a lender will think before the lender says it. It misses the down payment entirely (a smaller loan always improves it) and it uses the lender's expense assumptions, which may be stricter than yours.

Worked example: one house, five ratios

The example house used across this site as a finished rental: $320,000, 1,600 sq ft, 3 bed 2 bath. Rent $2,400 a month, operating expenses taken as 40% of rent, 25% down and a 30-year loan at 7% on the rest. All of it is an example, not market data.

Read top to bottom, each ratio narrows the one before it. Rent-to-price says the house is expensive relative to rent. GRM says eleven years of gross rent. Cap rate says 5.4% on the house itself, below the 7% the loan costs, so borrowing hurts. Cash flow says −$156.73 a month at 25% down. DSCR says a lender sees 90% coverage.

None of this is a verdict. With these expenses, the house breaks even at about $2,661 of rent and reaches a DSCR of 1.2 at about $3,193; a 40% down payment ($128,000) brings the payment to $1,277.38 and the cash flow to +$162.62 a month, 1.5% cash-on-cash. The ratios show where the money goes and which input would change the picture; whether that is a deal for you depends on your cash, your rent estimate and your plan for the house.

How the app computes them from the same numbers

In Flip Investor OS the free rental quick check takes exactly the inputs above: price, monthly rent, operating expenses as an amount or as a share of rent, and optionally the down payment and the monthly loan payment. From them it returns rent ÷ price with the 1% rule marked, GRM, yearly NOI, cap rate, monthly cash flow, cash-on-cash and DSCR.

Two details follow the rule that unknown is never $0. Without a down payment the cash-on-cash is not shown, because dividing by nothing is not a return; without a loan payment the DSCR is not shown and the cash flow is the NOI. A blank price or rent means no result at all, not a result built on zero. Nothing you enter is saved. Open the free calculator and check a listing in a minute.

When a house becomes a deal in the app, the BRRRR reading does the full version of this check: the running costs itemized (vacancy, management, maintenance, reserves, taxes, insurance, other) from your own defaults, the new loan sized from the ARV and the lender's LTV, the payment from the rate and term, and the cash left in the deal next to the cash flow and the DSCR. The flip reading sits beside it on the same house, as described in flip vs BRRRR, and a stress test with the rent 10% lower and the rate 1% higher shows how much of the margin is real. The app does not say whether to buy; it shows the figures and what moves them.