Rental Property

Estimating Cash Flow, Cap Rate, and Cash-on-Cash Return

A rental property’s cash flow is what’s left of the rent after every expense — including the mortgage — is paid. Enter the purchase price, financing terms, expected rent, and operating expenses, and this calculator shows the monthly cash flow along with the cap rate and cash-on-cash return, two standard metrics investors use to compare properties.

The Formula

1. Monthly cash flow = $\vA{\text{Monthly Rent}} - \text{Total Monthly Costs}$ (mortgage payment + property tax + insurance + HOA + maintenance + vacancy allowance + management fee).
2. Net Operating Income (NOI) = $\vA{\text{Annual Rent}} - \text{Annual Operating Expenses}$, deliberately excluding the mortgage payment — NOI describes the property itself, independent of how it’s financed.
3. Cap rate = $\text{NOI} \div \vB{\text{Purchase Price}}$ — a quick way to compare properties regardless of financing, though what counts as a “good” cap rate varies significantly by market.
4. Cash-on-cash return = $\text{Annual Cash Flow} \div \vC{\text{Total Cash Invested}}$ (down payment + closing costs) — the return on the investor’s own money, as opposed to the property’s total value.

Worked Example

A $\vB{\$250,000}$ property, 20% down, a 6.5% 30-year mortgage, renting for $\vA{\$2,200\text{/month}}$, with $3,000/year property tax, $1,200/year insurance, 8% maintenance, 5% vacancy, 8% management, and $5,000 closing costs:

1. Monthly mortgage payment (on the $200,000 loan): $1,264.14.
2. Total monthly expenses (mortgage + tax + insurance + maintenance + vacancy + management): $2,076.14.
3. Monthly cash flow: $\vA{2,200} - 2,076.14 = 123.86$ — this property is projected to cash flow positively at these assumptions.
4. Annual NOI: $16,656, for a cap rate of $16,656 \div \vB{250,000} = 6.66\%$.
5. Cash-on-cash return: 2.70% on the $\vC{\$55,000}$ actually invested.

Key Factors to Consider

• NOI and cash flow measure different things, and both matter for a full picture. NOI describes the property’s own income-generating ability independent of financing, which is what makes cap rate useful for comparing different properties on equal footing — cash flow (which DOES include the mortgage payment) is what actually lands in the investor’s pocket each month, and depends heavily on how the specific purchase is financed.
• Vacancy and maintenance allowances are estimates that smooth out real-world lumpiness, not guarantees. A property might go months without a vacancy and then sit empty for a stretch, or need no repairs for a year and then require a major one — the percentage-based allowances used here represent a long-run average, not what happens in any single specific year.
• Cap rate expectations vary significantly by market and property type. A cap rate considered attractive in one metro area or property class can look unappealing in another — there’s no single universal “good” cap rate threshold, which is why comparing a specific property’s cap rate against comparable local properties matters more than comparing it to a generic benchmark.
• This calculator estimates operating cash flow, not total investment return. It doesn’t factor in the property’s own appreciation over time or the tax benefits of depreciation, both of which can meaningfully add to a rental property’s total real-world return beyond monthly cash flow alone — worth considering as part of the fuller investment picture.

Common Mistakes

• Underestimating vacancy and maintenance as one-off costs rather than ongoing allowances. Skipping these percentage-based line items to make a property look more profitable on paper produces a cash flow figure that doesn’t hold up over a real multi-year holding period.
• Comparing cap rates across very different markets or property types as if they mean the same thing. A 5% cap rate can be strong in one market and weak in another — always compare against genuinely similar local properties, not a single “rule of thumb” number.
• Forgetting that cash-on-cash return only measures the return on cash actually invested, not on the property’s full value. A property with a modest cap rate can still show a strong cash-on-cash return if it’s financed with a small down payment, since leverage changes the two metrics differently.

Useful to Know

• Want to check the mortgage payment itself in more detail, including a full amortization schedule? Mortgage Calculator breaks down principal, interest, taxes, and insurance.
• Curious how long it would take to recover the cash invested through cash flow alone? Payback Period Calculator finds the point where accumulated cash flow covers the initial investment.
• Considering financing the purchase against an existing property’s equity instead? Home Equity / HELOC Calculator estimates how much you could borrow and at what payment.