Rental property investment terms, defined

Income and operating metrics

Gross scheduled income

The total rent a property would collect in a year if it were fully occupied at market rent, plus any other income (parking, laundry, storage). It is the starting point for every cash flow calculation, before any losses come out.

Vacancy rate

The share of potential rent lost to empty units and turnover, expressed as a percentage of gross income. A common planning assumption is 5% to 8%, but it varies a lot by market and property. See how to estimate operating expenses for how to set this realistically.

Formula: vacancy loss = gross scheduled income × vacancy rate.

Effective gross income

Gross scheduled income minus vacancy and credit losses. It is the rent you actually expect to collect, and it is what operating expenses get measured against.

Operating expenses

The recurring costs of running the property: property taxes, insurance, maintenance, property management, and reserves. By convention, operating expenses exclude the mortgage payment, depreciation, and capital expenditures. Lumping the mortgage in here is one of the most common beginner mistakes.

Net operating income (NOI)

Income left after operating expenses but before the mortgage and taxes. NOI is the backbone number in property analysis, because it describes the property itself independent of how you financed it.

Formula: NOI = effective gross income − operating expenses. Walk through it step by step in how to calculate rental cash flow.

Cash flow

The money left in your pocket after everything, including the mortgage. Pre-tax cash flow is NOI minus annual debt service. It is the number most investors actually feel month to month.

Return metrics

Cap rate (capitalization rate)

The unleveraged annual return a property produces relative to its price, as if you paid all cash. It is the standard way to compare properties on an apples-to-apples basis.

Formula: cap rate = NOI ÷ property value × 100. There is no single "good" number; what is a good cap rate covers the ranges investors actually use.

Cash-on-cash return

The annual pre-tax cash flow measured against the actual cash you invested (down payment, closing costs, and upfront repairs). Because it accounts for financing, two people can buy the same property and earn very different cash-on-cash returns.

Formula: cash-on-cash = annual pre-tax cash flow ÷ total cash invested × 100. See cash-on-cash vs cap rate vs ROI for how these three differ.

Return on investment (ROI)

A broad term for total return relative to what you put in. In rentals it often folds in cash flow, loan paydown, appreciation, and tax benefits, which is why "ROI" means different things to different people. Always ask what a given ROI figure includes.

Internal rate of return (IRR)

The annualized return that accounts for the timing of every cash flow across a holding period, including the eventual sale. It is the discount rate at which the net present value of all cash flows equals zero. IRR is more complete than cash-on-cash because a dollar received in year one is worth more than a dollar in year ten, but it requires projecting future cash flows and a sale price, so it is only as good as those assumptions.

Gross rent multiplier (GRM)

A quick screening ratio comparing price to gross annual rent. Lower is generally cheaper relative to rent. It ignores expenses entirely, so treat it as a first-glance filter, not an analysis.

Formula: GRM = property price ÷ gross annual rent.

Financing metrics

Debt service

Your total loan payments over a period, usually the annual principal and interest on the mortgage. It is the number that turns NOI into actual cash flow.

Debt service coverage ratio (DSCR)

How comfortably the property's income covers its loan payments. Lenders use it to size loans; a common floor is 1.25, meaning income is 25% above the payment.

Formula: DSCR = NOI ÷ annual debt service. DSCR loans explained covers how lenders use it and where a rent-based version differs.

Tax terms

Cost basis

What the property is worth for tax purposes: generally the purchase price plus buying costs and capital improvements, minus the land value (land is not depreciable). Basis matters because it drives both your annual depreciation and your taxable gain when you sell.

Depreciation

An annual paper deduction that lets you write off the building's cost over its useful life: 27.5 years for residential rental property, 39 years for commercial, under the IRS MACRS schedule. It reduces your taxable rental income even though it is not a cash expense. The OBBBA tax changes made 100% bonus depreciation permanent for the shorter-life components.

Depreciation recapture

When you sell, the IRS "recaptures" the depreciation you claimed (or were allowed to claim) and taxes it, generally at up to 25%, separately from the rest of your capital gain. It is why the tax bill at sale is usually bigger than people expect, and one reason investors use a 1031 exchange to defer it.