The three metrics that matter
Real estate investment analysis runs on a few core ratios. Understanding what each measures — and where each is misleading — separates investors who make money from those who buy based on feel.
Cap Rate (Capitalization Rate)
Formula: Cap Rate = NOI / Purchase Price
NOI (Net Operating Income) = Gross rental income − vacancy − operating expenses (not including debt service). Cap rate tells you the return you'd earn if you bought with all cash.
A $300,000 property with $24,000 annual rent, 5% vacancy ($1,200), and $8,400 in operating expenses: NOI = $24,000 − $1,200 − $8,400 = $14,400. Cap rate = $14,400 / $300,000 = 4.8%.
In mid-2026 Florida markets: single-family residential cap rates run 4–6% in most metro areas. 7%+ is rare and often signals higher risk (older property, challenging neighborhood).
Cash-on-Cash Return
Formula: CoC = Annual Pre-Tax Cash Flow / Total Cash Invested
This measures actual cash return on the money you put in, including leverage. Using the same property with 20% down ($60,000) and a 7% 30-year mortgage on $240,000: monthly P&I = $1,597. Annual debt service = $19,164. Annual cash flow = NOI − debt service = $14,400 − $19,164 = −$4,764 (negative).
Negative cash flow doesn't mean a bad investment — appreciation and principal paydown may still generate returns. But it means you're subsidizing the investment monthly.
Gross Rent Multiplier (GRM)
Formula: GRM = Purchase Price / Annual Gross Rent
Quick back-of-envelope filter: at $300,000 with $24,000 annual rent, GRM = 12.5. Lower is better. Under 10 was common in Midwest markets; 12–15 is typical in appreciation-focused Florida markets.
The expenses operators always underestimate
- Vacancy: 5–8% is realistic in Florida. Short-term vacation rental markets can see 20%+ seasonal variance.
- Property management: 8–12% of collected rent if you use a manager.
- Maintenance and CapEx: Budget 8–12% of rent for ongoing maintenance plus separate reserves for major systems (roof, HVAC). The 1% rule is too simplistic — use component-age modeling.
- Insurance: Florida investment properties pay 15–25% more than owner-occupied. Budget accordingly.
- Property tax: Investment (non-homesteaded) properties in Florida pay the full assessed rate with only a 10%/yr cap, not the 3% homestead cap. This compounds quickly.
What good returns look like today
In mid-2026, with rates at 7–7.5% on investment properties and Florida cap rates at 4–6%, most financed Florida residential investments produce negative or near-zero cash flow on purchase. Investors are pricing in appreciation and rent growth. If cash flow is your goal, target markets where cap rates exceed mortgage rates — which means looking outside the coastal Florida metros or at higher-yield property classes.
