To calculate ROI on a rental property, you run three numbers: cap rate (net operating income divided by purchase price), cash-on-cash return (annual cash flow divided by the cash you actually put in), and the 1% rule (monthly rent should be at least 1% of price). Together they tell you whether a deal cash flows before you ever make an offer.
No single number tells the whole story. A house can pass one test and fail another. Here is how the math works, with real Metro Detroit numbers.
What formulas do you use to calculate rental ROI?
Start with these four formulas. Each answers a different question:
| Metric | Formula | Answers |
|---|---|---|
| Cap rate | Net operating income ÷ purchase price | What does the property earn, ignoring your loan? |
| Cash-on-cash return | Annual pre-tax cash flow ÷ total cash invested | What is the cash you put in actually earning? |
| The 1% rule | Monthly rent ÷ purchase price | Quick screen: is rent high enough for the price? |
| Gross rent multiplier (GRM) | Purchase price ÷ annual gross rent | How many years of rent equal the price? Lower is better. |
Net operating income (NOI) is rent minus operating expenses (taxes, insurance, maintenance, property management, vacancy) but not your mortgage. Cash flow is NOI minus the mortgage. That distinction is where a lot of first deals go sideways.
What is cap rate vs. cash-on-cash return?
Cap rate measures the property. Cash-on-cash measures your deal on that property.
Cap rate strips out financing, so two investors buying the same house get the same cap rate. It is the clean comparison tool. Cash-on-cash return factors in your down payment, closing costs, and rehab, so it changes depending on how much you borrow. Put more money down and your cash flow rises but your cash-on-cash can fall, because you tied up more cash to get it.
Most investors treat a cap rate of 5% to 10% as solid, with single-family rentals often landing around 5% to 6% in competitive markets. For cash-on-cash, 7% to 12% is widely considered a good return.
What is the 1% rule?
The 1% rule is a five-second screen, not a verdict. If a property’s monthly rent is at least 1% of the purchase price, it is worth a closer look. A $150,000 house should rent for around $1,500 a month to pass.
Fewer homes clear the 1% rule than a decade ago, so treat it as a filter, not a finish line. A property at 0.9% can still cash flow with the right financing or a rent bump after light renovation. Pair it with gross rent multiplier (a GRM of 4 to 7 is the common benchmark) and you can sort a stack of listings fast before running full numbers on the finalists.
A worked example with Metro Detroit numbers
Here is a realistic near-suburb single-family deal, current as of mid-2026:
- Purchase price: $120,000
- Monthly rent: $1,450 ($17,400 a year)
- Operating expenses (taxes, insurance, maintenance, management, vacancy) at roughly 40% of rent: $6,960
- Financing: 25% down ($30,000) plus $8,000 closing and light rehab = $38,000 cash in; $90,000 loan at 7% over 30 years = about $7,188 a year in payments
Now the four numbers:
| Metric | Calculation | Result | Read |
|---|---|---|---|
| NOI | $17,400 − $6,960 | $10,440 | Property earnings before the loan |
| Cap rate | $10,440 ÷ $120,000 | 8.7% | Strong for a single-family rental |
| Cash flow | $10,440 − $7,188 | $3,252/yr | About $271 a month in the pocket |
| Cash-on-cash | $3,252 ÷ $38,000 | 8.6% | Right in the good range |
| 1% rule | $1,450 ÷ $120,000 | 1.2% | Passes |
| GRM | $120,000 ÷ $17,400 | 6.9 | Inside the 4 to 7 benchmark |
One deal, four green lights. That is what you are hunting for. (And yes, we will run these on any address you send us. We kind of enjoy it.)
Is Metro Detroit a good place to buy a rental?
For cash flow, it is one of the stronger markets in the country. Detroit’s average cap rate sits around 11%, well above most metros, with commercial assets averaging near 8.74%. Metro Detroit’s average asking rent is roughly $1,332 a month, up about 1.9% year over year in early 2026, and suburban vacancy near 4% points to real demand.
The catch: returns are hyper-local here, block by block. Renovated single-family homes have been renting for $1,000 to $1,200 a month off purchase prices in the $60,000 to $90,000 range in parts of the city, while Oakland County near-suburbs trade cash flow for appreciation. Royal Oak apartments average around $1,538 a month, and areas like Hazel Park, Oak Park, Harper Woods, and Redford are projected to appreciate 5% to 7%.
Translation: the right street matters more here than in almost any market. That is exactly the part we are built for.
How we help investors at Jim Shaffer & Associates
We have sold roughly 850 houses a year across Royal Oak, Ferndale, Berkley, and everywhere in between since 1999 ($2 billion and counting), so we know which blocks rent and which ones sit. For investors, that local read is the whole game.
Here is how we work a deal with you:
- We pull comps and realistic rent numbers for the exact street, not a citywide average.
- We run cap rate, cash-on-cash, and the 1% rule on any address before you offer.
- We flag the taxes, the deferred maintenance, and the vacancy risk that quietly eat returns.
- We tell you when a deal does not work. That call saves more money than the ones that do.
One property or a portfolio, we will run the math with you first. Talk to an agent and send us an address. We will tell you what it really returns.
Frequently asked questions
What is a good ROI on a rental property?
It depends on the metric. A cap rate of 5% to 10% is generally considered solid, and a cash-on-cash return of 7% to 12% is widely viewed as a good deal. Metro Detroit often runs higher than national averages on cap rate, but returns vary sharply by neighborhood.
What is the difference between cap rate and cash-on-cash return?
Cap rate measures the property itself (net operating income divided by purchase price) and ignores your loan. Cash-on-cash return measures your specific deal (annual cash flow divided by the cash you invested) and reflects your down payment and financing. Use cap rate to compare properties, cash-on-cash to judge your position.
Does the 1% rule still work in 2026?
It works as a fast screen, not a final answer. If monthly rent is at least 1% of the purchase price, the deal is worth a closer look. Fewer homes clear it than a decade ago, so pair it with cap rate and gross rent multiplier before you decide.
Is Metro Detroit good for rental property investment?
For cash flow, it is one of the stronger markets nationally, with average cap rates well above most metros and steady rent growth into 2026. The trade-off is that returns are hyper-local. The right block cash flows, the wrong one struggles, so local knowledge matters more here than almost anywhere.
How much money do I need to buy a rental in Metro Detroit?
Plan on 20% to 25% down plus closing costs and any rehab. On a $120,000 single-family rental, that is roughly $38,000 in cash to get started. Lower-priced Detroit properties can require less, while Oakland County suburbs like Royal Oak run higher.