The metrics that matter most
Three numbers anchor a rental comparison:
Cash-on-cash return: annual pre-tax cash flow divided by total cash invested (down payment + closing costs + immediate repairs). This measures yield on your actual out-of-pocket capital and is comparable across deals regardless of purchase price.
Cap rate: net operating income divided by purchase price. Useful for comparing unlevered returns and for assessing market pricing — but it ignores your financing terms and doesn't reflect your actual equity yield.
Gross rent multiplier (GRM): purchase price divided by annual gross rent. Quick to calculate; useful for screening but ignores expenses and vacancy.
For a serious side-by-side comparison, build a proforma for each property using the same assumptions for vacancy (typically 5–8%), expense ratio, and financing terms. Use the actual market rate for each property's financing — a lower-rate loan on Deal A may be worth more than the apparent difference in cap rates.
What deal structure changes the comparison
Two properties may look similar on cap rate but very different on cash-on-cash return if financing terms differ. A property requiring 25% down versus one where 20% is acceptable changes your invested capital and therefore your cash yield.
Don't overlook total return: cash flow + principal paydown + expected appreciation. A property with lower initial cash-on-cash in a growing market may generate higher total return over 10 years. Model both scenarios before deciding, especially if you're comparing a high-cash-flow stable market against a lower-yield appreciation market.
After-tax comparisons are the most accurate: depreciation deductions differ by purchase price, and properties with higher depreciable values produce larger paper losses that offset rental income. Run the after-tax cash flow for each deal if you're in a higher bracket.
A worked example
Deal A: $300,000 purchase price, 20% down ($60,000), $24,000 gross rent, $10,000 operating expenses, $9,600/year mortgage P&I, NOI = $14,000, cap rate = 4.7%, cash flow after debt service = $4,400, CoC = 7.3%.
Deal B: $450,000 purchase price, 25% down ($112,500), $36,000 gross rent, $16,000 operating expenses, $13,500/year P&I, NOI = $20,000, cap rate = 4.4%, cash flow = $6,500, CoC = 5.8%.
Deal A produces higher cash-on-cash return (7.3% vs. 5.8%). Deal B has more absolute cash flow ($6,500 vs. $4,400) and a larger property likely to appreciate more in dollar terms. Which wins depends on your goals: higher yield now (A) or absolute return and equity building (B).
Frequently asked questions
What is the best metric for comparing two rental properties?
Cash-on-cash return is the most comparable yield metric for properties with different prices and financing. Cap rate is better for unlevered market comparisons. Use both together.
Should I compare properties before or after tax?
Both. Pre-tax cash flow is a standard comparison; after-tax cash flow (accounting for depreciation deductions) can differ significantly between deals, especially at higher income levels.
How do I account for different financing terms when comparing two deals?
Standardize the comparison by running both deals at the same loan-to-value ratio, or compare each deal on its actual proposed terms. The second approach reflects reality; the first shows the underlying property quality independent of leverage.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.