Key takeaways
- Run four numbers: cash flow, cap rate, cash-on-cash, and total ROI.
- Cash flow is the gate — a property that bleeds monthly is a liability.
- Cap rate compares deals regardless of financing; cash-on-cash judges your leveraged return.
- Underwrite real expenses: vacancy, maintenance, capital reserves, and management.
Step 1 — Estimate income and real expenses
Start with gross rent, then subtract a vacancy allowance (often 5–8%) and true operating expenses: taxes, insurance, repairs, maintenance, capital reserves, and management. The single biggest beginner error is counting only taxes, insurance, and the mortgage — which makes almost any deal look profitable.
Step 2 — Check the cap rate
The capitalization rate is net operating income ÷ price. It strips out financing so you can compare two properties on equal footing. Run it in the cap rate calculator — most U.S. rentals land in a 4–10% range depending on market and risk.
Step 3 — Run cash flow and cash-on-cash return
Now add the mortgage. What's left each month is your cash flow; the annual figure divided by the cash you invested is your cash-on-cash return. This is the number that matters once you use a loan — leverage can push it above the cap rate or, if the rate or expenses are too high, below zero.
Step 4 — See the whole first-year return
Cash flow isn't the only way a rental pays you. Loan paydown and appreciation add to the total. The rental property ROI calculator rolls cash flow, principal paydown, and appreciation into a single first-year ROI — useful, as long as you remember appreciation is an assumption, not a promise.
A faster first screen
Before any of this, the 1% rule is a five-second filter: if monthly rent is well under 1% of the all-in cost, the deal rarely cash-flows and you can move on.
Frequently asked questions
What's the most important number?
Monthly cash flow — a property that loses money each month is a liability regardless of the other metrics. Cap rate and cash-on-cash then confirm the price and financing.
How much cash flow should a rental make?
Many investors want at least $100–$200 positive per unit per month after everything, but targets vary by market.
What expenses do beginners forget?
Vacancy, repairs/maintenance, capital reserves, and management. Skipping them is how new investors overstate cash flow.