A good cap rate that loses money every month

Here is a property that looks fine. Purchase price two hundred and eighty five thousand, rent twenty one fifty a month, operating expenses about sixty seven hundred a year, six percent vacancy. Cap rate works out at 6.2 percent, which in most markets is a number you would be happy to quote.

Now put the mortgage back in. Twenty percent down, fourteen fifty eight a month. Cash flow is five dollars.

Five dollars. Not five hundred.

Both numbers are true

Cap rate ignores your mortgage on purpose. It describes the building, so two identical houses get the same cap rate whether the buyer paid cash or borrowed ninety percent. That is what makes it useful for comparing properties.

It is also what makes it useless for answering whether you can afford this one. Cash flow answers that, and cash flow includes the loan.

Quoting only the flattering one is how people end up owning something that technically performs and practically drains them.

What five dollars a month actually means

One vacancy and you are down two thousand. One boiler and you are down four. An insurance renewal that jumps eighteen percent, which is not unusual, takes the whole thing negative permanently.

A property at five dollars a month is not a small win. It is a coin standing on its edge.

The number I would look at first

Cash flow after a realistic capital expenditure reserve. Roofs, boilers and windows do not arrive monthly, so they never appear in a monthly model, and then they arrive all at once. Setting aside even a hundred and fifty a month for them changes the picture honestly, and it is the difference between a model and a forecast.

Run that on the property above and it is not marginal any more. It is negative, and you would want to know that before signing rather than in year three.

I am not saying do not buy it. Appreciation is real and so is the loan being paid down by someone else. I am saying know which number you are relying on, because if the answer is appreciation then you are not buying a rental, you are buying a bet with a tenant in it.