What is a good cap rate for a rental property?

A good cap rate depends on the market and risk profile. U.S. residential rentals average 5%–6%: above 8% is excellent (often riskier markets), 6%–8% is strong, 4%–6% is average, and below 4% is low (common in high-appreciation coastal markets). Higher cap rates typically mean lower appreciation expectations and more risk; lower cap rates mean you're paying for future growth. Always compare cap rates within the same market — a 5% cap rate in San Francisco may be excellent while 5% in Detroit is weak.

What is cash-on-cash return and how is it different from cap rate?

Cap rate measures unconditional yield: NOI / property price, ignoring financing. Cash-on-cash return measures leverage-adjusted yield: annual cash flow (after mortgage payments) / down payment. A property with a 5% cap rate financed at 7% will have a negative cash-on-cash return (the mortgage costs more than the cap rate yields). Cash-on-cash tells you what your actual cash investment earns each year; cap rate tells you the property's intrinsic earning power before financing.

How much down payment do I need for an investment property?

Most lenders require 20%–25% down for non-owner-occupied investment properties (vs. 3%–5% for owner-occupied homes). Putting down less than 15% is aggressive and rare — lenders view investment properties as higher risk because landlords are more likely to default on a rental than their own home. A larger down payment (30%+) lowers the monthly payment and improves cash flow but ties up more cash. Aim for 25% down as a baseline; adjust based on the rate, cash flow goals, and your risk tolerance.

What expenses should I include when calculating rental ROI?

Operating expenses include: property taxes (typically 0.8%–1.5% of value), insurance ($1,000–$2,000/year), maintenance (1%–2% of property value annually), property management (8%–12% of gross rent if using a manager), vacancy allowance (5%–10% of gross rent), and HOA fees if applicable. Do not include the mortgage payment in operating expenses — that's debt service, deducted from NOI to get cash flow. Underestimating expenses is the #1 mistake new landlords make; budget 40%–50% of gross rent for expenses.

What is the 1% rule in real estate?

The 1% rule says monthly rent should be at least 1% of the purchase price (e.g., $2,000/month rent on a $200,000 property). This typically produces a positive cash flow after expenses and mortgage. The 2% rule is even stricter (common in low-cost Midwest markets). In high-cost coastal markets, the 1% rule is rarely achievable — investors there accept lower yields betting on appreciation. Use the 1% rule as a quick screen, but always run full numbers with this calculator before buying.

Should I buy a property with negative cash flow?

Generally no. Negative cash flow means you're paying the tenant's rent shortfall every month — a drain that can lead to foreclosure if you lose your job or rates rise. The exception is the 'bet on appreciation' strategy in high-growth markets: if appreciation + equity build-up exceeds the cash flow drain, the total return can still be positive. But this is risky — if appreciation stalls, you're stuck subsidizing the property indefinitely. Insist on positive cash flow as a safety buffer; only accept negative cash flow if you have deep reserves and strong conviction on appreciation.

How does leverage affect rental property returns?

Leverage (a mortgage) magnifies both returns and risk. Example: a $300,000 property appreciating 3%/year gains $9,000 in year 1. With 100% cash, that's a 3% return on $300,000. With 25% down ($75,000), that same $9,000 appreciation is a 12% return on cash — plus you benefit from loan paydown. But if the property depreciates 3%, you lose $9,000 (12% of your down payment) while the cash buyer only loses 3%. Leverage also improves cash-on-cash return when the cap rate exceeds the mortgage rate.

How long should I hold a rental property?

Plan for at least 5–10 years to amortize transaction costs (closing costs ~3% on buy, selling costs ~6%–8% on sell = ~10% round-trip). Appreciation compounds over time: 3% for 10 years = +34%; 3% for 20 years = +81%. Longer holds also allow more loan paydown and rent increases. The 'sell window' typically opens after year 5 when equity build-up and appreciation have overcome transaction costs. Tax benefits favor long holds: properties held 1+ year qualify for long-term capital gains (15%–20%) vs. short-term (ordinary income); Section 1031 exchanges defer taxes entirely if you reinvest.

Rental Property ROI Calculator

A rental property ROI calculator is a free online tool that projects your total return on a real estate investment. It accounts for financing, operating expenses, cash flow, appreciation, and equity build-up to show cap rate, cash-on-cash return, and annualized return. Free, no sign-up required.

Property & Financing

Property Price?Enter your property price.

Down Payment?The amount you plan to pay upfront when purchasing the home.

Interest Rate?The annual interest rate on your mortgage loan.

Loan Term?The length of your mortgage in years. Common terms are 15 or 30 years.

Property Tax Rate?The annual property tax rate as a percentage of home value.

Insurance (Annual)?Enter your insurance (annual).

End of inputs

Rental Income & Expenses

Monthly Rent?The monthly rent amount you currently pay or expect to pay.

Vacancy Rate?Expected percentage of time the property is vacant.

Maintenance Rate?Enter your maintenance rate.

Management Rate?Enter your management rate.

Appreciation Rate?Expected annual home value appreciation.

Holding Period?How many years you plan to own the home before selling it.

End of inputs

Your Rental Property ROI

Annual Cash Flow

-$7,083.44

-$590.29/month

Cap Rate

3.96%

NOI / price

Cash-on-Cash

-8.10%

Annual CF / down payment

Sale Equity

$245,113.39

After 10 years

Total Return

99.18%

Over 10 years

Annualized Return

7.13%

CAGR

Price: $350,000.00. Down: $87,500.00 (25.00%). Rate: 7.00%. Rent: $2,200.00/mo. NOI: $13,873.60. Monthly payment: $1,746.42. Cash flow: -$7,083.44/year. Sale: $470,370.73 ($245,113.39 equity).

Equity Growth: Property Value, Loan Balance & Equity Over Time

Return Components: Down Payment vs Sale Equity vs Cash Flow vs Total Proceeds

Key Insights

Your cash flow is negative — $7,083.44/year ($590.29/month) out of pocket. You're paying the tenant's rent shortfall every month. This works only if appreciation and equity build-up exceed the cash flow drain (the "bet on appreciation" strategy). Reduce the price, increase the down payment, lower the rate, or raise rent to break even. Negative cash flow properties risk foreclosure if you lose your job or rates rise.

Your 3.96% cap rate is low — below the 5%–6% U.S. average for residential rentals. This is common in high-appreciation coastal markets (where investors accept low yields for growth) but risky in flat markets. The property barely covers expenses before debt service; with a mortgage, cash flow will likely be negative. Consider a lower purchase price, higher rent, or a market with better yields.

Your total return of 99.18% (7.13% annualized) over 10 years is strong — approaching a doubling of your $87,500.00 down payment. Sale equity ($245,113.39) and cumulative cash flow (-$70,834.40) combine for solid wealth creation. Compare this annualized return to stocks (~7%–10% historical) to verify real estate is the right choice for this capital.

Your 25.00% down payment is standard for investment property — most lenders require 20%–25% down for non-owner-occupied homes. This balances leverage and safety: you benefit from appreciation on the full property value while keeping monthly payments manageable. Improve the rate (shop lenders, raise credit score) to boost cash flow without raising the down payment.

Your 3.00% appreciation assumption is realistic — in line with the U.S. long-term average (~3%–4%). Over 10 years, $350,000.00 grows to $470,370.73. Appreciation is the primary wealth builder in real estate; compounding over 10+ years is powerful. Local markets vary widely: verify with historical price data for your specific ZIP code.

Guide

How to Use This Calculator

1Enter the property purchase price — what you'll pay for the house.
2Set the down payment. Investment properties typically require 20%–25% down; adjust to match your financing.
3Set the mortgage interest rate. Investment property rates run ~0.5%–1% above owner-occupied rates; shop multiple lenders.
4Choose the loan term. 30-year loans maximize cash flow; 15-year loans build equity faster but cost more monthly.
5Set the property tax rate (typically 0.8%–1.5% of value, varying by state). Check your county assessor's website.
6Set the annual insurance premium ($1,000–$2,000 typical for a single-family rental).
7Enter the monthly rent. Verify with rent comps from Zillow, Rentometer, or local property managers.
8Set the vacancy rate (5% typical; 8%–10% in transient markets). This accounts for turnover and unpaid rent.
9Set the maintenance rate (1%–2% of property value annually for older homes; less for new construction).
10Set the management rate (8%–12% of gross rent if using a property manager; 0% if self-managing).
11Set the expected annual appreciation rate. Use 3% as a baseline (U.S. long-term average); adjust for your market.
12Set the holding period (years you plan to own before selling). 5–10 years is typical.
13Review the annual cash flow, cap rate, cash-on-cash return, sale equity, total return, and annualized return in the result panel.
14Use the AI insights to assess cap rate competitiveness, cash flow quality, leverage, appreciation outlook, and total return.

Formula

How It's Calculated

Monthly mortgage payment (amortization):

  PMT = P × (r/12) / (1 − (1 + r/12)^(−12n))

  where P = loan principal (price − down payment),
        r = annual interest rate, n = loan term (years).

Annual gross income (after vacancy):

  Gross Income = Monthly Rent × 12 × (1 − Vacancy Rate)

Annual operating expenses:

  Expenses = Property Tax + Insurance
           + Price × Maintenance Rate
           + Gross Income × Management Rate

Net Operating Income (NOI):

  NOI = Gross Income − Expenses

Cap Rate (unconditional yield):

  Cap Rate = NOI / Price

Annual Cash Flow (after debt service):

  Cash Flow = NOI − (Monthly Payment × 12)

Cash-on-Cash Return (leverage-adjusted yield):

  CoC Return = Annual Cash Flow / Down Payment

Property value at sale (after holding period):

  Sale Value = Price × (1 + Appreciation Rate)^Holding Years

Sale equity (proceeds at sale):

  Sale Equity = Sale Value − Remaining Loan Balance

Total return (over holding period):

  Total Return = (Sale Equity + Total Cash Flow − Down Payment) / Down Payment

Annualized return (CAGR):

  Annualized Return = ((Sale Equity + Total Cash Flow) / Down Payment)^(1/Holding Years) − 1

Example: $350,000 price, $87,500 down (25%), 7% rate,
30-year loan, $2,200/month rent, 5% vacancy, 3% appreciation,
10-year hold.
- Monthly payment ≈ $1,746
- NOI ≈ $13,874 (cap rate ≈ 3.96%)
- Annual cash flow ≈ −$7,084 (negative — bet on appreciation)
- Sale value ≈ $470,364 (after 10 years at 3% appreciation)
- Sale equity ≈ $232,364 (after loan paydown)
- Total return ≈ 105% over 10 years (≈7.4% annualized)

Glossary

Key Terms

FAQ

Frequently Asked Questions

Related Calculators

Investment Property Calculator

Analyze rental property cash flow, cap rate, and cash-on-cash return. Includes vacancy, maintenance, and property management.

Compound Interest Calculator

See how your money grows with compound interest and regular contributions, adjusted for inflation.

Retirement Calculator

Project your retirement savings and monthly income with the 4% safe withdrawal rate.