There was an investor looking for a two-bedroom rental in St. Louis. After crunching the numbers with a purchase price of $170,000 and a monthly rent of $1,600, the annual yield came out to over 11%. On the surface, it looked like a decent return. The problem was that they completely overlooked the vacancy period. It took two months to find a new tenant after the previous one moved out, and during that time, management fees and property taxes continued to accrue. By the end of the year, the actual yield was only half of the initial calculation.

The reason for such mistakes is simple. People tend to judge based solely on total yield. Total yield is calculated by dividing the annual rental income by the purchase price. In St. Louis, the median rent in the city is around $1,250 (as of 2026), and Zillow reports the average home value in the city is $171,687. Plugging these numbers in, the total yield from an annual rental income of $15,000 divided by the purchase price results in a total yield of about 8.7%. This is not a bad figure for a city where rents are 41% lower than the national average.

However, this figure does not account for any expenses. What needs to be considered is the net yield, or cap rate. The cap rate is the annual net operating income divided by the purchase price, and the net operating income is the total income minus property taxes, insurance, management fees, maintenance costs, and vacancy losses. The effective property tax rate in St. Louis is around 1.34%, which is higher than the Missouri state average of 1.25% and the national average of 1.02%. When factoring in insurance, maintenance costs, and vacancy losses, total operating expenses can often rise to around 50% of rental income. For the example property mentioned earlier, the cap rate would drop to around 4%, which is half of the total yield.

If the property was purchased with a loan, the cash-on-cash return also needs to be considered. Cash-on-cash return is calculated by dividing the pre-tax cash flow remaining after paying the loan principal and interest by the actual cash invested, which includes the down payment and closing costs. While the cap rate shows the profitability of the asset itself, cash-on-cash return indicates the actual money left in hand when leverage is used. During periods of high interest rates, the difference between these two can be significant.

In markets like St. Louis, where the purchase price is relatively low, the 1% rule can also be a useful guideline. This rule suggests that if the monthly rent is more than 1% of the purchase price, there is a good chance of positive cash flow, although it is not an absolute standard. However, even this rule can lead to mistakes if vacancy rates are not considered. When evaluating a potential investment, it is wise to also check the vacancy rate, tenant demand, and school district ratings in the target area.

Taking it a step further, the concept of total return should also be examined. Total return includes not only cash flow income but also capital appreciation, asset increase due to loan principal repayment, and tax benefits from depreciation. In markets like St. Louis, where the purchase price is low, the cap rate tends to be relatively stable, but it should also be noted that significant capital appreciation is not likely. Whether to lean towards areas with low cap rates but high capital appreciation or those with high cap rates but modest appreciation depends on the investment goals.

Many people considering a move from other states also look at St. Louis. For those coming from states with lower property tax rates, the 1.34% figure may seem burdensome, while those coming from areas with much higher property taxes may find it relatively low. It is easy to make mistakes if one carries over the standards from their previous location, so it is advisable to obtain the actual property tax bill and insurance quotes for the target property. Checking the school district ratings is also helpful for future reference when transitioning to owner-occupancy.

This article is not investment or legal advice, and tax and rental laws can vary by county, so it is recommended to consult with a professional before making any actual agreements.