Interest Rate

An interest rate is the price of borrowing money, stated as an annual percentage of the loan balance. On a financed rental it sets the mortgage payment, which comes straight out of cash flow. Few inputs move cash on cash return as much.

On the default $375,000 loan over 30 years, 7.25% costs $30,698 a year and leaves $9,512 of cash flow, a 6.3% return on $150,000. At 6.25% the return rises to 8.3%. At 8.25% it falls to 4.3%. One point of rate is worth about two points of cash on cash on this deal.

The rate also decides whether borrowing helps at all. When the mortgage constant is above the cap rate, each extra dollar of debt lowers the return on your cash. Run the deal at today's quoted rate, not the rate you hope to refinance into later.

Further reading: Interest Rate on Wikipedia.