Know your cash flow before you buy.
Enter the numbers on any rental and see the whole deal: monthly cash flow, cap rate, cash-on-cash return, and how your equity and total return grow year by year.
The property
Is this a good deal?
Where the rent goes each month
Monthly income vs expenses
Equity and value over time
Return scorecard
Year-by-year projection
Assumes rent and expenses grow with your rent-growth rate and the property appreciates each year.
| Year | Cash flow | Loan balance | Property value | Equity | Total return |
|---|
Rental investing, explained
How to Evaluate a Rental Property Investment
Evaluating a rental property requires analyzing both the income potential and the total costs of ownership. Start by estimating the gross rental income based on comparable properties in the area, then subtract all operating expenses including property taxes, insurance, maintenance, and property management fees. The resulting net operating income (NOI) is the foundation for most investment metrics. A thorough evaluation also considers the local rental market demand, vacancy rates, and the property's condition to avoid costly surprises after purchase.
Understanding Cap Rate and Cash-on-Cash Return
Cap rate (capitalization rate) is calculated by dividing the net operating income by the property's purchase price, giving you a quick snapshot of the property's yield independent of financing. A higher cap rate generally indicates higher potential returns but also higher risk. Cash-on-cash return measures your actual cash income against the cash you invested, making it especially useful for leveraged purchases where you use a mortgage. Most experienced investors in the U.S. look for cash-on-cash returns of 8% to 12%, though this varies widely by market and property type.
Hidden Costs of Owning Rental Property
Many first-time investors underestimate the true costs of rental property ownership beyond the mortgage payment. Maintenance and repairs typically run 1% to 2% of the property value per year, and major capital expenditures like a new roof or HVAC system can cost $5,000 to $15,000 or more. Vacancy periods between tenants mean lost income, and the average vacancy rate in the U.S. hovers around 6% to 7%. Other commonly overlooked expenses include landlord insurance premiums, legal fees for evictions, accounting costs, and potential HOA dues.
Tips for First-Time Landlords
Successful landlording starts with thorough tenant screening, always run credit checks, verify employment, and contact previous landlords before signing a lease. Setting aside a dedicated reserve fund of at least three to six months of expenses protects you from unexpected repairs or extended vacancies. Familiarize yourself with your state's landlord-tenant laws, as regulations around security deposits, eviction procedures, and habitability requirements vary significantly across the U.S. Consider hiring a property management company (typically 8% to 10% of monthly rent) if you don't have the time or desire to handle day-to-day tenant issues yourself.
Common questions
What is a good cap rate for a rental property?
A cap rate of 5% to 10% is generally considered good, though it varies by market. Urban areas with high demand may have lower cap rates (4%-6%) but offer better appreciation. Higher cap rates (8%-10%) often mean more risk or less desirable locations.
What is the 1% rule in real estate?
The 1% rule says a rental property should generate monthly rent of at least 1% of the purchase price. A $300,000 property should rent for at least $3,000 per month. It is a quick screening tool but should not replace full financial analysis.
How much should I set aside for maintenance?
Budget 1% to 2% of the property value per year for maintenance and repairs. For a $300,000 property, that is $3,000 to $6,000 annually. Older homes may require more. The "50% rule" suggests half of gross rent goes to expenses (not including the mortgage).
What vacancy rate should I assume?
A 5% to 8% vacancy rate is common for residential properties in stable markets. This accounts for tenant turnover, advertising time, and the occasional month without rent. In less desirable areas, assume 10% or higher.
Do I need a larger down payment for an investment property?
Yes. Most lenders require 20% to 25% down for investment properties, compared to 3% to 20% for primary residences. Interest rates are also typically 0.5% to 0.75% higher. You will also need cash reserves of 3 to 6 months of payments.
Estimates for planning only. Real returns depend on financing terms, local market conditions, actual expenses, tenant quality and time in the market. Verify every figure before you buy.