When investors size up a rental property, three numbers come up constantly: NOI, cap rate, and GRM. They answer three related questions — how much does the property actually earn, what return does that represent, and is the asking price even in the right ballpark?
Learn these three and you can compare any two rental deals on equal footing, regardless of how each one is financed.
NOI: What the Property Actually Earns
Net operating income (NOI) is the property's income after operating expenses but before any mortgage payment:
NOI = effective rental income − operating expenses
Effective rental income is gross scheduled rent minus a vacancy allowance, plus any extras like parking or laundry. Operating expenses include property taxes, insurance, maintenance, property management, utilities you pay, and reserves for big-ticket replacements. What NOI deliberately excludes is debt service — the mortgage — and that exclusion is the whole point. NOI describes the property itself, not your loan.
Example: a duplex rents for $2,600 a month, or $31,200 a year. Subtract 7% for vacancy (about $2,180) and $9,500 in operating expenses, and NOI is roughly $19,500. That number stays the same whether you buy with cash or 80% financing.
Cap Rate: The Financing-Independent Return
The capitalization rate, or cap rate, converts NOI into a return:
Cap rate = NOI ÷ property value
Our duplex with $19,500 of NOI at a $300,000 price has a cap rate of 6.5%. Read it as the annual return the property would produce if you bought it outright with cash — no loan involved.
Because it ignores financing, the cap rate is the cleanest way to compare deals against each other and against a market. Two properties in the same neighborhood can be compared cap-rate-to-cap-rate even if one buyer uses a big down payment and the other doesn't. It also works in reverse: if similar properties in an area trade around a 6% cap rate, a property with $19,500 of NOI is worth roughly $325,000 to that market.
Cap rates also encode risk. Stable neighborhoods with strong tenants tend to trade at lower cap rates; rougher areas or heavier-management properties trade higher. A high cap rate is not automatically a better deal — it is often the market pricing in more risk or more work.
GRM: The 30-Second Screen
The gross rent multiplier (GRM) is the quick-and-dirty version:
GRM = purchase price ÷ annual gross rent
The $300,000 duplex renting for $31,200 a year has a GRM of about 9.6. Lower is better — you are paying fewer years of gross rent for the property — and many investors use roughly under 10 as a first-pass target, though it varies widely by market.
GRM's weakness is that it ignores expenses entirely. Two properties with identical GRMs can have very different NOIs if one has high taxes or an aging roof. Treat GRM as a screen: it tells you which listings deserve a full analysis, not which ones to buy.
Using All Three Together
A practical workflow looks like this:
- Screen with GRM. Skip listings that are wildly overpriced relative to rent.
- Build a real NOI. Use actual taxes, realistic vacancy, and honest expense estimates — not the seller's rosy pro forma.
- Judge with cap rate. Compare the resulting cap rate to what similar properties earn in that market.
Then layer your financing on top to see your personal cash flow and cash-on-cash return. The free Shouldirefi Deal Analyzer handles the full chain — enter rent, expenses, price, and loan terms, and it estimates NOI, cap rate, and your projected cash flow in one pass, so you can rank several candidate deals side by side.
All figures are estimates for informational purposes only — not financial advice. Consult a qualified professional before making financial decisions.