CazaShort answer: Usually not on its own. A 30-year loan at 7% costs about 7.98% of the balance each year, which is more than a 6% cap rate earns, so borrowing hurts your return and cash flow lands near zero. Leverage helps only when the cap rate is above the loan constant.
What is the loan constant, and why does it decide this?
The loan constant is annual debt service divided by the loan amount. It is the yearly cost of each dollar borrowed, principal and interest together. A 30-year loan at 7% has a constant of about 7.98%. An interest-only loan at 7% has a constant of exactly 7.0%.
The cap rate is NOI divided by price, so it is what each dollar of property earns before the loan. Compare the two:
- Cap rate above the loan constant: positive leverage. Each borrowed dollar earns more than it costs, so borrowing raises your cash-on-cash return.
- Cap rate below the loan constant: negative leverage. Each borrowed dollar costs more than it earns, so borrowing lowers your return.
Mortgage rates around 7% put the amortizing constant near 8%, which is above many cap rates. That is why a 6% cap rate feels thin right now. These are illustrative numbers, not forecasts.
Is a 6% cap rate good with a 7% mortgage?
Here is the plain math on a sample property bought with a 75% loan. Closing costs are ignored to keep it readable, and the numbers use the unrounded payment.
| Price | $500,000 |
|---|---|
| Cap rate and NOI | 6.0%, so NOI is $30,000 |
| Loan | 75% of price, $375,000 at 7%, 30 years |
| Monthly principal and interest | $2,495 |
| Annual debt service | $29,939 |
| Loan constant | 7.98% |
| DSCR (NOI ÷ debt service) | 1.00 |
| Annual cash flow | $61 |
| Cash invested | $125,000 down payment |
| Cash-on-cash return | 0.05% |
The property earns 6.0% on its price, so an all-cash buyer would see a 6.0% cash-on-cash return. The 75% loan cuts that to 0.05%, because the debt costs 7.98% to earn 6.0%. NOI covers the payment and nothing more. Any vacancy, repair or rate surprise pushes cash flow negative.
What changes the answer?
Four levers move the result. Each row below changes one thing from the example above.
| Scenario | Loan | Debt service | Loan constant | DSCR | Cash flow a year | Cash-on-cash |
|---|---|---|---|---|---|---|
| Base: 75% loan, 7%, 30 years | $375,000 | $29,939 | 7.98% | 1.00 | $61 | 0.05% |
| Interest-only at 7% | $375,000 | $26,250 | 7.00% | 1.14 | $3,750 | 3.00% |
| 50% down, 7%, 30 years | $250,000 | $19,959 | 7.98% | 1.50 | $10,041 | 4.02% |
| Rate of 6.5%, 75% loan | $375,000 | $28,443 | 7.58% | 1.05 | $1,557 | 1.25% |
| NOI up 10% to $33,000 | $375,000 | $29,939 | 7.98% | 1.10 | $3,061 | 2.45% |
- More down payment turns cash flow positive and lifts DSCR, but the return stays under 6%, because the loan constant is still above the cap rate. You are lowering the damage, not creating positive leverage.
- A lower rate shrinks the constant. At 6.5% it is 7.58%, still above 6%.
- Interest-only drops the constant to the rate itself, but you owe the full balance later, and the constant is still above 6%.
- Rent upside is the lever that changes the cap rate. A 10% higher NOI is a 6.6% cap rate on the same price. It helps, but it is a bet on rent you have not collected yet.
Lenders also look at DSCR, and many want more than 1.0, often 1.2 or higher. Minimums vary by lender and loan type.
How do you check this on a Zillow listing?
- Estimate rent from nearby active rentals. See how to estimate rent with rental comps.
- Subtract vacancy, taxes after reassessment, insurance and repairs to get NOI, then divide by price for the cap rate. Steps are in how to check cap rate and cash flow.
- Compute the loan constant for your rate and term: annual payment divided by loan amount.
- Compare. If the cap rate is below the constant, expect thin or negative cash flow unless you add equity or find rent upside.
The 1% rule is a faster first screen, but it cannot tell you whether the loan helps or hurts.
Do it faster with Caza
Caza is a Chrome extension that works on Zillow listings. Its rental comps show nearby active asking rents. Its investor numbers show cap rate, monthly cash flow and DSCR with property tax and insurance prefilled and editable, so you can type in your own rate and down payment and see where DSCR lands. Asking rents are not signed leases, and every figure is an estimate to check, not an appraisal.
FAQ
Is a 6% cap rate good with a 7% mortgage?
Not by itself. A 30-year loan at 7% has a loan constant of about 7.98%, above a 6% cap rate, so the loan lowers your return. On a $500,000 property with 75% financing, cash flow comes out near zero.
What is positive leverage in real estate?
Positive leverage means the cap rate is higher than the loan constant, so each borrowed dollar earns more than it costs. When the cap rate is lower, leverage is negative.
How do you calculate the loan constant?
Divide annual debt service by the loan amount. A $375,000 loan at 7% over 30 years costs about $29,939 a year, so the constant is about 7.98%. An interest-only loan at 7% has a constant of 7.0%.
Does Caza show DSCR and cash flow?
Yes. Caza shows cap rate, monthly cash flow and DSCR on Zillow listings, with property tax and insurance prefilled and editable. You enter your own down payment and rate. Asking rents are estimates, not leases.
Want rent comps, cap rate and cash flow on every Zillow listing?
Try the Caza Chrome extensionCaza is independent and not affiliated with Zillow. Zillow’s menus and features change, so check the current page. Any example numbers are sample data, not a real listing, and not lending, tax or investment advice.