The 50% rule (and when it breaks)
Veteran investors assume opex (taxes, insurance, mgmt, maintenance, capex) eats 50% of gross rent before debt. In low-tax states (TX, FL), 40% is closer. In high-tax coastal markets (NJ, IL), 55% is realistic. Plug your actual numbers — don't default to the rule.
Why cap rate alone misleads
Cap rate uses no leverage — it tells you the asset's unlevered yield. Cash-on-cash uses your actual down payment. A 5% cap with 25% down and a 7% mortgage produces negative cash-on-cash even though the asset 'yields 5%.' The two numbers measure different things.
The hidden 4th return: depreciation
Residential rentals depreciate over 27.5 years. A $350K property generates ~$10K/yr in paper losses that can offset rental income for tax purposes. At a 32% marginal bracket, that's $3,200/yr in tax savings — often the difference between negative and positive after-tax cashflow.
Related guides
Long-form playbooks on the same topic, written by the RevenueLab editorial team.
Personal Loan Guide 2026: Real Rate Bands by Credit Tier, the Origination Trick, and When Consolidation Pays
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Read the guideState of Side Income 2026: Real Net Hourly Pay, Breakeven, and Tax Across 15 Side Hustles
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Read the guideFAQ
What's a good cash-on-cash return?
8%+ is the 2026 benchmark for buy-and-hold investors. Below 5%, you're better off in dividend stocks. Above 12% usually signals deferred maintenance, problem tenants, or a market with structural risk.
Should I include appreciation in ROI?
Separately — yes. Appreciation is speculative; cashflow is real. Underwrite to cashflow; treat appreciation as upside.
What about property management?
Hire one if you own 3+ doors or live >30 min away. Self-management saves 8–10% of rent but costs nights and weekends. Build the 8–10% into opex even if you self-manage — it's the true cost.
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