Cap rate, cash-on-cash, and the 1% rule: which one actually matters for Section 8
Ask five Section 8 investors which metric matters most and you'll get five different answers, mostly because they're not actually being asked the same question. Cap rate, cash-on-cash return, and the 1% rule measure different things. Using the wrong one for the decision in front of you is how marginal deals get greenlit and good ones get passed over.
Cap rate: the deal quality question, independent of financing
Cap rate is net operating income divided by purchase price — unlevered, meaning it deliberately excludes your mortgage payment. It answers "how good is this deal on its own merits, regardless of how I finance it?" That makes it the right tool for comparing two properties or two markets against each other, since financing terms don't distort the comparison.
It's the wrong tool for answering "what do I actually pocket every month," because most Section 8 investors are financing with 25% down, not paying cash — and cap rate doesn't know that.
Cash-on-cash return: what you actually pocket
Cash-on-cash return is annual cash flow divided by the actual cash you put in — your down payment, plus any rehab. This is levered, meaning it directly reflects your financing. It answers "for the dollars I actually risked, what's my return." For an investor putting 25% down and financing the rest, this is usually the metric that matters most day to day, because it's the one that maps to your actual bank account.
The tradeoff: cash-on-cash return is sensitive to the mortgage rate you got, which means two identical properties can show very different cash-on-cash numbers purely because one investor financed at a better rate. It measures your return, not the property's underlying quality.
The 1% rule: a screening heuristic, not an underwriting metric
The 1% rule — monthly rent should be at least 1% of purchase price — is a fast filter for a first pass through a list of listings. It is not a substitute for real underwriting, and it gets specifically misleading in SAFMR markets, where the "rent" side of the equation can be 20-40% higher than county-wide FMR in an affluent zip code and 20-30% lower in a depressed one. A property that clears the 1% rule using a SAFMR-inflated zip can still be a bad deal once you run the real expense stack; a property that misses the 1% rule by a hair in a county-FMR market can still cash flow fine.
Use it to decide what's worth a closer look. Never use it to decide what to buy.
Run all three, not just your favorite
The honest move is to compute all three and understand what each one is telling you: cap rate for deal quality independent of your financing, cash-on-cash for what you actually take home given your real down payment and rate, and the 1% rule only as a first-pass filter before you do either of the other two. Our free cash flow calculator computes cap rate, a target-return max purchase price, breakeven price, and vacancy runway together against live FY2026 HUD FMR data, so you're not choosing one number and hoping it's the right one.
Disclaimer: The views, thoughts, and opinions expressed in this blog post are strictly those of the author. They do not necessarily reflect the official policy or position of The Section 8. Also, let's be honest, they could be completely wrong. This content is provided for informational purposes only. Consult with a qualified professional, attorney, or financial advisor for investment or legal advice specific to your situation.