Frequently Asked Questions
What is cash-on-cash return?
Annual pre-tax cash flow divided by total cash invested (down payment, closing, initial repairs). It measures the return on actual cash deployed, not on the property's full value. Many investors target 8-12% cash-on-cash.
What is the 1% rule?
A quick screen: monthly rent should equal at least 1% of purchase price. A $200,000 property should rent for $2,000/month. The rule is hard to find in most coastal markets in 2025; midwestern markets still produce 1%+ deals.
How do I account for vacancy and maintenance?
Standard assumptions: 5-10% vacancy, 1-2% of property value annually for maintenance, 8-10% of rent for property management. Skipping these makes projections look 30-40% better than reality.
What tax benefits do rentals offer?
Depreciation deduction (residential: 27.5 years straight-line), mortgage interest deduction, expense write-offs, and potential 1031 exchange to defer gains on sale. Depreciation recapture at 25% applies on sale unless rolled forward.
What is the difference between cap rate and cash-on-cash return?
Cap rate measures the property's return ignoring financing (NOI divided by price). Cash-on-cash measures what you earn relative to the cash you actually put in, and it does account for the mortgage. Cap rate compares deals apples-to-apples; cash-on-cash reflects your real leveraged outcome.
Why can cash flow be negative when the cap rate is positive?
Cap rate leaves out mortgage payments. If debt service exceeds NOI, your cash flow turns negative even though the property is profitable on an unleveraged basis. Higher rates or a smaller down payment push more deals into negative cash flow.
What does the Year-1 total return include?
Three pieces: the annual cash flow, the principal you pay down in the first year (equity buildup), and the estimated price appreciation. Combined, they give a fuller picture of your real return than cash flow alone.
Should I factor appreciation into my analysis?
You can include it as a projection, but remember it is not cash in hand until you sell or refinance. Many conservative investors underwrite on cash flow and cap rate alone and treat appreciation as a bonus rather than a core part of the return.
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This calculator provides estimates for educational purposes only and is not investment advice. Past performance does not guarantee future results. Consult with a qualified financial advisor before making investment decisions. All investments carry risk, including potential loss of principal.