Several years ago, I vividly remember the moment I was first asked to evaluate the profitability of a rental property. It was a three-bedroom single-family home not far from downtown Colorado Springs, and the request was to determine if this house was a good investment based solely on the purchase price and expected rent. My initial question was simple: Would dividing the monthly rent by the purchase price provide the answer?

To get straight to the point, it's not that simple. The first calculation to consider when evaluating rental income is the Gross Rental Yield. This is calculated by dividing the annual total rental income by the purchase price and multiplying by 100. Plugging in the rental and home price levels for Colorado Springs gives a clearer picture. According to Zillow's data from August 2026, the average rent in Colorado Springs is around $1,950 per month, and the median home price compiled by Steadily is $485,000. Using these figures to calculate the gross rental yield results in an annual income of $23,400 divided by $485,000, which gives approximately 4.8 percent.

If the terminology is unfamiliar, think of it this way: Gross rental yield is a concept of revenue without deducting any costs. It does not account for property taxes, insurance, or losses during vacancy periods. Therefore, to see the actual profitability, one must move on to the net operating income (NOI) yield, commonly referred to as the Cap Rate. The Cap Rate is the annual NOI divided by the purchase price. NOI is the total income minus operating expenses such as property taxes, insurance, management fees, maintenance costs, and vacancy losses, and it does not include mortgage principal and interest.

Colorado has relatively low property tax burdens. According to SmartAsset, the average effective property tax rate in Colorado is 0.49 percent, which is about half of the national average of 0.9 percent. This is particularly appealing for those considering relocating from other states. However, one cannot judge total operating costs based solely on property taxes. Applying the industry-standard 50% rule, one can assume that operating expenses, excluding mortgage principal and interest, are roughly half of the total rental income. Using this standard for the Colorado Springs example, the NOI is about $11,700 annually, and the Cap Rate comes out to around 2.4 percent.

But that's not the end of it. The actual perceived yield should be viewed through the lens of Cash-on-Cash Return. If a loan was taken out to purchase the property, the monthly principal and interest payments significantly affect cash flow. Assuming a 20 percent down payment and applying the average 30-year fixed mortgage rate of 6.67 percent announced by Freddie Mac on August 13, 2026, the loan principal and interest alone would be close to $30,000 annually. The previously calculated NOI would not be sufficient to cover this payment structure. While the Cap Rate may look favorable, the Cash-on-Cash Return could turn negative.

The most significant lesson I learned when I first took on this review was precisely this point. If I had only looked at the gross rental yield, the property might have seemed like a decent investment, but once leverage was factored in, the picture changed entirely. Of course, cash flow is not everything. Total returns must consider not only the cash coming in each month but also the steadily decreasing loan principal that builds equity, as well as any appreciation in property value. In areas like Colorado Springs, which have stable rental demand due to military bases and defense contractors, the risk of vacancy is relatively low, which is also worth considering.

While the 1 percent rule suggests that if the monthly rent exceeds 1 percent of the purchase price, the cash flow is likely to be healthy, this is merely a rough guideline and not an absolute basis for judgment. Each property has different structures for property taxes, insurance, and management fees, so it's essential to verify the local tax rates and insurance estimates before finalizing any contracts. This article is not investment or legal advice, and if you are close to making a deal, I recommend reviewing specific figures with a tax advisor or real estate professional.