The three numbers that decide whether a rental property is a goldmine or a money pit.
Walk into any real estate investing forum and you'll hear the same three terms thrown around: cash flow, cap rate, cash-on-cash return. They sound technical. They're not. Each one answers a different question, and together they tell you almost everything you need to know about whether a property is worth buying.
Here's the thing — most people who buy rentals never run these numbers. They look at the price, eyeball the rent, and figure they'll come out ahead. Sometimes they do. More often, they end up cash-flow negative for years, paying out of pocket every month for a "investment" that's actively losing them money.
Don't be those people.
Cash flow: do you make money every month?
This is the simplest one. After collecting rent and paying everything — mortgage, taxes, insurance, maintenance, the works — how much is left? If it's positive, you're making money. If it's negative, the property is costing you money to own.
People often get into negative cash flow situations because they hope appreciation will bail them out. The property goes up in value, they sell, the gain covers the years of losses. Sometimes this works. Sometimes the market dips for a decade and you've been bleeding money the whole time. Cash flow is what keeps you in the game long enough to benefit from appreciation.
The minimum acceptable cash flow varies by investor, but most experienced landlords won't touch a property cash-flowing less than $200 a month per unit. The reason is simple: one busted water heater wipes out half your year of cash flow. You need a buffer.
Cap rate: how good is the property itself?
Cap rate ignores your mortgage entirely. It asks a different question: if you paid all cash for this property, what would your annual return be? It's a way to compare properties on equal footing, regardless of how each one is financed.
Cap rate is calculated as annual rent minus operating expenses (but not mortgage), divided by purchase price. A property that nets $24,000 a year on a $300,000 price has an 8% cap rate.
Healthy cap rates depend a lot on where you are. In high-cost markets like San Francisco or Manhattan, finding anything above 4% is rare — investors there are betting on appreciation, not yield. In Cleveland or Memphis, 8-10% is achievable. The rule of thumb most investors use: anything below 5% is appreciation play, 5-8% is solid, 8%+ is a real cash machine.
Cash-on-cash: how good is YOUR deal?
This is where leverage comes in. Cash-on-cash return measures how much you make each year compared to the actual cash you put down. If you put $69,000 down and the property generates $6,000 a year in cash flow, that's an 8.7% cash-on-cash return.
The reason real estate investors love leverage is that it amplifies returns. The same property might have an 8% cap rate (unlevered) and a 12% cash-on-cash return (levered with a mortgage). The bank's money is doing some of the work for you.
But leverage also amplifies risk. If the rent doesn't cover the mortgage, you're in trouble fast. That's why cash flow needs to come first — leverage only works if the underlying numbers work.
The expenses people forget
The fastest way to ruin your real estate math is to underestimate expenses. New investors look at their monthly mortgage and think that's the cost of owning the property. It isn't. Real expenses include property tax (often 1-2% of value annually), insurance ($1,500-3,000/year), maintenance (1% of value annually as a long-term average), vacancy reserves (5-10% of rent), property management (8-10% of rent if you're not self-managing), and capital expenditures for major repairs (roof, HVAC, foundation).
Most experienced investors use the 50% rule as a quick screen: total operating expenses tend to be about 50% of gross rent over time. That means a property renting for $2,500/month should expect about $1,250/month in expenses (excluding mortgage). It's a rough number, but it's saved a lot of new investors from disaster deals.
About the calculation
This calculator uses standard real estate investment formulas. Cap rate = (annual rent − annual operating expenses) / property price, expressed as a percentage. Cash-on-cash return = annual cash flow / total cash invested (down payment + closing costs). Mortgage payments use the standard amortization formula required by the federal Truth in Lending Act. The formulas match the methodology used by the National Association of Realtors, IRS Publication 527, and major real estate education platforms. Real-world returns can vary significantly due to vacancies, unexpected repairs, market conditions, and tax treatment — your actual deal is the source of truth.