Question 1

What is a good cap rate on a rental property?

Accepted Answer

Cap rate is net operating income divided by purchase price, and what counts as good is entirely local. In Chicago neighborhoods, stabilized two to four unit properties commonly trade between 6 and 9 percent, with stronger submarkets trading tighter. Cap rate ignores financing, so compare it against other properties, not against your loan rate.

Question 2

What DSCR do lenders require on a rental?

Accepted Answer

Most DSCR lenders want 1.20x to 1.25x minimum, meaning net operating income is at least 120 to 125 percent of annual debt service. Below 1.0x the property does not cover its own mortgage. Anything between 1.0x and 1.2x usually means a larger down payment or a rate buydown.

Question 3

Does the 1% rule still work?

Accepted Answer

It is a screening filter, not an underwriting method. Monthly rent at 1 percent of purchase price historically signaled cash flow, but it ignores taxes, insurance, and interest rates, all of which have moved sharply. Use it to decide what to underwrite, then underwrite it properly.

Question 4

What expense ratio should I budget?

Accepted Answer

Operating expenses of 45 to 55 percent of effective gross income is typical for small residential with taxes and insurance included. Under 40 percent usually means something is missing from the model, most often capital reserves or a realistic property tax figure after reassessment.

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