What this calculator is actually working out
A rental property makes money in four separate ways, and they arrive at very different speeds. There is the rent that shows up every month, the slice of each mortgage payment that quietly buys you a bit more of the building, the change in what the property is worth, and the lump sum left over on the day you sell. A deal can look poor on one of those and excellent on the others, which is exactly why so many arguments about whether a rental is good go nowhere.
This tool models all four across the whole holding period. It starts from the money you hand over on closing day, runs the rent and the operating costs forward year by year with whatever growth rates you set, subtracts the mortgage, tracks the loan balance falling as the property value rises, and then sells the thing at the end and works out what you are left holding. Every number on the result card is a different way of summarizing that same simulation.
The single figure most people come for is the first one shown: what the property puts in your pocket each month once every cost has been paid. It is deliberately the headline because it is the number that decides whether you can comfortably own the property at all. A deal that promises a fine return in fifteen years but bleeds $300 a month between now and then is a very different proposition from one that pays for itself from the first tenant.
The formulas behind every number
Nothing here is hidden. The chain runs from gross rent down to cash in hand, one deduction at a time.
Effective income. Vacancy comes off everything the property could collect. Management is then charged on what actually arrives, because an agent earns a percentage of collected rent, not of theoretical rent:
Collected = Gross − (Gross × vacancy%) − management% × (Gross − vacancy loss)
Net operating income. Subtract every operating cost — tax, insurance, HOA dues, maintenance, anything else — but never the mortgage. Excluding debt is the whole point of NOI: it describes the building, not your financing.
The mortgage. A standard amortizing payment, with P the loan amount, i the monthly rate and n the number of payments:
and the balance still owed after t months, which is what drives the equity column:
The three headline ratios. Each divides a different profit by a different base, which is why they disagree so often:
Cash flow = NOI − annual mortgage payments
Cash-on-cash = annual cash flow ÷ cash invested
The sale. The property grows at your appreciation rate from its starting value — the purchase price, or the after-repair value if you told it repairs are needed. Selling costs come off the price, and the outstanding loan is repaid from the proceeds:
Net proceeds = Value(y) × (1 − cost to sell) − loan balance
If you enter a sale price instead of an appreciation rate, the calculator works backwards to the growth rate that connects the two, and uses that consistently for every intermediate year, so the equity column still makes sense in year three.
The IRR. The final figure is the discount rate that makes every cash flow — the money out on day one, each year's cash flow, and the sale proceeds at the end — net out to exactly zero:
There is no formula that solves that directly, so it is found by narrowing the range until the answer stops moving. The table prints the IRR you would have earned had you sold at the end of each year, which is why the early years look terrible: selling in year one means paying a full round of transaction costs on a property you have barely owned.
What to put in each field
- Purchase price. The contract price. Keep closing costs in their own field rather than folding them in, so the cap rate stays comparable with how other people quote it.
- Down payment. Conventional lenders generally want 20% to 25% on an investment property, and price the loan better at the higher end. Owner-occupied house hacking is the main exception.
- Closing costs. Origination and lender charges, appraisal, title work, recording, prepaid escrow. Two to five percent of the price is a normal range.
- Repairs before renting. Turn this on for a property you have to fix before a tenant can move in. The repair budget joins your cash invested, and the value after repairs becomes the starting point for appreciation rather than what you paid.
- Property tax, insurance, HOA, maintenance, other. Annual figures. Landlord insurance costs more than a homeowner policy, and maintenance is the line people underestimate most — one percent of the property value a year is a reasonable starting assumption for a house in decent condition, more for anything older.
- The increase column. Each cost compounds at its own rate. Property tax often tracks assessed value, insurance has been rising faster than general inflation in much of the country, and HOA dues do their own thing entirely.
- Rent and other income. Rent is monthly. Other income covers parking, coin laundry, storage or pet rent — small amounts that add up over a long hold.
- Vacancy rate. The share of the year the unit sits empty or the rent does not arrive. Five to eight percent is the usual planning range.
- Management fee. Eight to twelve percent of collected rent is typical for a full-service manager. Set it to zero only if you genuinely intend to do the job yourself, and be aware you are paying yourself in time instead of money.
- Appreciation or sale price. Enter a growth rate if you are forecasting, or a specific price if you have a number in mind. Long-run US home price growth has hovered a little above three percent a year, though any individual decade can look nothing like that.
- Holding period and cost to sell. Agent commission, transfer taxes and closing fees usually come to six to eight percent of the sale price. Because that hits once, a longer hold spreads it over more years of income and lifts the IRR.
Cap rate, cash-on-cash and IRR answer three different questions
Investors use these three interchangeably in conversation and then wonder why the numbers do not line up. They are measuring different things on purpose.
Cap rate asks: how good is this building? It deliberately ignores your mortgage, so two buyers with completely different financing looking at the same property compute the same cap rate. That makes it the right tool for comparing one property against another, and the wrong tool for judging your own return, since it says nothing about what you actually paid in cash.
Cash-on-cash asks: what is my down payment earning this year? This is the one that reflects leverage. Put less cash in and the same profit is spread over a smaller base, so the percentage rises — right up until the mortgage payment swallows the cash flow and the figure turns negative. It is a single-year snapshot and it moves every year as rents climb against a fixed payment.
IRR asks: how did the whole thing go? It is the only one of the three that counts the loan paydown and the appreciation, and the only one that respects timing — a dollar in year two is worth more than a dollar in year twelve. It is also the most sensitive to assumptions you cannot verify, since a change of one percentage point in appreciation moves it noticeably. Treat a high IRR that depends entirely on the sale price as a forecast, not a finding.
The rules of thumb, and where they break
Three shortcuts circulate constantly in US real estate forums. All three are screening devices, and all three are misused as conclusions.
The 1% rule wants monthly rent to be at least one percent of the price. It is a fast way to bin obviously weak deals, and it has become progressively harder to satisfy as prices outpaced rents. Plenty of perfectly good properties in strong markets now sit closer to 0.6%, and plenty of properties that clear 1% easily are in places where the appreciation never comes.
The 50% rule assumes operating expenses will eat roughly half of the rent, before any mortgage payment. It is a useful sanity check against your own spreadsheet: if you have added up taxes, insurance, maintenance, vacancy and management and landed at fifteen percent of rent, you have almost certainly forgotten something. Fill the fields honestly and see where you actually land.
The 70% rule belongs to flipping rather than renting. It says not to pay more than 70% of the after-repair value minus the repair budget, leaving room for holding costs, selling costs and the profit that justifies the work. If you are using the repairs option here to model a BRRRR-style purchase, it is a reasonable ceiling on what to offer.
Why a mortgage flatters the return — until it doesn't
Switch the loan toggle off and watch what happens. The monthly cash flow usually jumps, because the largest single outgoing disappears. The cash-on-cash return and the IRR usually fall, because the same profit is now spread across four or five times as much of your own money. Neither version is the correct one; they answer different questions about the same building.
Leverage works when the property earns more than the loan costs. If a building throws off a 7% cap rate and the mortgage costs 6.5%, every borrowed dollar is faintly profitable, and the down payment earns more than it would have unlevered. Invert that — a 5% cap rate against a 7% mortgage — and each borrowed dollar loses money each year, so the more you borrow the worse your position gets. That is the arithmetic behind a great many properties bought cheaply years ago that would not work at today's rates.
The other half of the story is risk. A mortgage is a fixed obligation set against an income that is not fixed at all. A cash buyer with an empty unit has an annoying year; a heavily financed buyer with an empty unit has a payment due on the first of the month regardless. This is the case for running the calculator twice, once with your expected vacancy and once with a bad year priced in, before deciding how much debt you are comfortable carrying.
What this calculator leaves out
Being explicit about the gaps is more useful than pretending there are none.
- Income tax and depreciation. Everything here is pre-tax. Depreciation, the interest and expense deductions, depreciation recapture and capital gains on sale all change the after-tax result, usually in the owner's favor, and all depend on circumstances this page knows nothing about.
- Capital expenditure. Maintenance is modeled as a smooth annual figure. Real roofs, furnaces and water heaters fail all at once, in an unhelpful year. Many investors budget a separate reserve of $100 to $200 per unit per month for these; if you want that reflected here, add it to the maintenance line.
- Refinancing and extra payments. The loan is assumed to run to term at a fixed rate, with no cash-out refinance and no additional principal.
- Rent control, licensing and local rules. Rent caps, registration fees, inspection regimes and eviction timelines vary enormously between states and cities, and any of them can change the numbers materially.
- Inflation. Every figure is nominal. A dollar of cash flow in year fifteen buys less than a dollar today, which flatters long holding periods slightly.
- Whether the assumptions hold. Appreciation, rent growth and vacancy are inputs, not forecasts. The calculator is exact about the arithmetic and knows nothing about your market.
Frequently asked questions
What is a good cash-on-cash return on a rental property?
Most buy-and-hold investors in the United States aim for somewhere between 6% and 10% in the first year, and treat anything above 12% as a strong deal that deserves a second look for hidden problems. The honest answer is that it depends on what else your money could be doing: if a broad index fund is expected to return around 8%, a rental returning 4% in cash is only worth owning if you are confident about the appreciation and the loan paydown that sit alongside it. Note that a first-year figure of 3% to 5% is common on financed deals in expensive markets, and it climbs every year as rents rise while the mortgage payment stays flat.
Is a 6% cap rate good for a rental property?
A 6% cap rate is around the middle of the range for residential rentals in most US metros. Lower cap rates, in the 4% to 5% band, usually signal an expensive, stable, high-demand area where buyers accept a smaller yield in exchange for lower risk and stronger appreciation. Higher cap rates of 8% and above tend to come with something attached: an older building, a softer rental market, or a neighborhood that has not been appreciating. Cap rate is only useful as a comparison between properties in the same market at the same time, so a 6% cap means very little until you know what similar buildings nearby are trading at.
How much cash flow should a rental property generate per month?
A widely quoted target among small landlords is $100 to $200 per unit per month after every expense, including a realistic allowance for vacancy, maintenance and management. The number matters less than what it is protecting: that margin is the buffer that absorbs a broken furnace or two months without a tenant. A property that clears $40 a month is not really cash-flowing at all, because one ordinary repair erases a whole year of it. Run the calculator with vacancy at 8% and maintenance at a higher figure to see whether the deal still stands up when a year goes badly.
What is the 1% rule in real estate?
The 1% rule says the monthly rent should be at least 1% of the purchase price, so a $250,000 property should rent for around $2,500 a month. It is a screening shortcut, not an analysis, and it exists so an investor can dismiss obviously weak deals in a few seconds without opening a spreadsheet. In much of the country it has become very hard to meet since prices rose faster than rents, and plenty of sound investments now come in nearer 0.6% or 0.7%. Use it to decide what deserves a closer look, then use the actual cash flow and cap rate to decide anything that matters.
How do I calculate ROI on a rental property?
There is no single ROI figure for a rental, which is why this calculator prints several. Cap rate divides net operating income by the price and ignores financing entirely. Cash-on-cash return divides the year's cash flow by the cash you actually put in, so it tells you what your down payment is earning. Total return, or IRR, is the complete answer: it counts the cash flow, the loan paydown, the appreciation and the selling costs across the whole holding period and expresses the lot as a single annual rate. Quote whichever one answers the question in front of you, but do not compare a cap rate on one deal against a cash-on-cash return on another.
Does this calculator include income tax and depreciation?
No. It works entirely in pre-tax cash, and depreciation, the deduction for mortgage interest and operating costs, depreciation recapture on sale, capital gains and any 1031 exchange are all outside its scope. That is deliberate, because the tax picture depends on your marginal rate, your filing status, whether the IRS treats you as a passive investor, and the state you are in. For most US landlords, depreciation makes the after-tax result better than the pre-tax figures shown here, sometimes markedly so. Ask a CPA to run your own numbers before you rely on any of it.
What vacancy rate should I use for a rental property?
Between 5% and 8% is the usual planning range for a stable long-term rental, which corresponds to roughly three weeks to a month of empty time per year. Use the lower end only if you have evidence for it, such as a local market with very short listing times and a property you have owned for years. Push toward 10% or above for student areas, seasonal markets, short-term rentals, or a building with high turnover, and remember that a single 60-day vacancy plus a turnover clean and repaint can cost more than the entire year's budgeted allowance.
Is it better to buy a rental property in cash or with a mortgage?
Financing raises the return on the cash you put in and lowers the cash flow you receive; paying cash does the reverse. Set the loan toggle to “No, all cash” and compare: the monthly cash flow usually rises sharply because the mortgage payment disappears, while the cash-on-cash return and IRR usually fall because the same profit is now spread over a much larger investment. Cash is the safer choice, since no lender can foreclose on a property you own outright and a long vacancy is survivable. A mortgage is the way to own several properties instead of one, and it is what makes leverage work for you in a rising market and against you in a falling one.
This calculator is an educational estimate, not financial, tax, legal or investment advice. Results are only as good as the assumptions you enter, and property markets, rents, insurance costs and interest rates all change. Figures are pre-tax and exclude depreciation, depreciation recapture and capital gains. Speak to a qualified real estate professional, lender and CPA before committing to a purchase. More about how we build and check these tools is on our About page, and our Privacy Policy explains what we do and do not collect — nothing you type here leaves your browser.