Before buying any rental property, you need to know two numbers: the cap rate and the cash-on-cash return. Here’s how to calculate both using real Montgomery numbers.
Cap Rate (Capitalization Rate)
Formula: Net Operating Income (NOI) ÷ Purchase Price
Example: A 3BR/1BA in East Montgomery purchased for $95,000. Section 8 rent: $1,100/month ($13,200/year). Annual expenses (taxes, insurance, management, maintenance reserves): ~$5,200. NOI = $8,000. Cap rate = $8,000 ÷ $95,000 = 8.4%.
Montgomery cap rates typically range from 7–12% for single-family rentals — significantly higher than coastal markets where 3–5% is common.
Cash-on-Cash Return (CoC)
Formula: Annual Pre-Tax Cash Flow ÷ Total Cash Invested
Same property with DSCR financing at 75% LTV: Down payment = $23,750. Closing costs = ~$3,000. Total cash in = $26,750. Annual mortgage payment = ~$6,000. Annual cash flow after mortgage = $8,000 − $6,000 = $2,000. CoC = $2,000 ÷ $26,750 = 7.5% — before appreciation, rent increases, and mortgage paydown.
The Full Picture
Cash-on-cash doesn’t capture everything. With Section 8, you also get: annual rent increases (2–4% as FMR rises), property appreciation (3–5%/year in Montgomery), mortgage principal reduction paid by your tenant, and tax benefits from depreciation. The total return often exceeds 15–20% annually.
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