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How to measure a rental property’s returns

A rental property can produce cash flow and build equity. Keep those amounts separate so you can see what is available to spend and what remains invested in the property.

1. Calculate cash flow

Start with scheduled rent. Deduct vacancy, operating expenses, capital reserves and mortgage payments. The calculator's $150,000 example, with $2,000 monthly rent and 25% down, produces $263.38 monthly cash flow, or $3,160.60 in Year 1 using unrounded figures.

Use the break-even rent calculator to find the rent that covers a specific monthly cost budget.

2. Compare cash flow with upfront cash

The example needs $37,500 down, $6,000 for closing and $10,000 for renovations: $53,500 in total. Its cash-on-cash return is $3,160.60 ÷ $53,500 = 5.91%.

3. Show mortgage paydown separately

The $112,500 loan, at 7.5% interest over 30 years, pays down $1,037.06 of principal in Year 1. Add that to cash flow to get $4,197.67 of cash plus equity gain. Dividing by the original $53,500 cash contribution gives a 7.85% annual cash plus equity return.

That is not an IRR or a total investment return. It excludes appreciation, sale proceeds and costs, refinancing and income taxes. Loan paydown cannot be spent without selling or borrowing against the property.

4. Check the assumptions over time

Year 1 uses today's inputs. Growth starts in Year 2. Rent-based expenses follow rent; dollar expenses, insurance and property taxes follow the fixed-expense growth assumption. Mortgage payments stop at the end of the loan term.

A 30-year projection is a scenario, not a forecast. Compare flat rent and several rent-growth assumptions, and allow for vacancies, operating costs and major replacements before judging the result.

Open the free calculator and try these figures

Illustrative example. Dollar figures are rounded for display; calculations use unrounded amounts.