Why cap rate alone is misleading
Cap rate ignores financing — two identical properties with different loans have wildly different cash returns. Always look at cap rate, cash-on-cash, and DSCR together. A 5% cap deal with 25% down and a 7% loan can still cash-flow if rents are conservative and operating expenses are tight.
- • Cap rate is the bond-equivalent yield of the asset, not the investor's return.
- • Cash-on-cash compares your actual capital to your actual cashflow.
- • DSCR tells you if the property pays its own mortgage with a margin of safety.
The 50% rule (and why it's a starting point, not gospel)
A common back-of-envelope: assume 50% of gross rent goes to non-mortgage expenses (taxes, insurance, vacancy, repairs, capex, management). It overstates expenses in newer suburban homes and understates them in older urban properties. Our 35% default is closer to a well-maintained SFR — push to 45–50% for older buildings, multi-unit, or self-managed Section 8.
Don't skip capex reserve
Roof, HVAC, water heater, paint, flooring — pretend that bill arrives on Jan 1, 2030 and you need to be ready. Setting aside $150–$300/door/month for capex is the difference between a real rental business and a 5-year fairy tale.
Most residential ROI calculators inflate returns by ignoring closing costs, vacancy, capex reserves, and the property management fee even self-managing landlords should bake in (your time has a price). This calculator runs the honest version — cash-on-cash, cap rate, and IRR proxy — so you find out if the deal beats an index fund before you wire the down payment.
What each input means
Get these inputs right and the output is reliable. Get them wrong and the calculator just multiplies bad assumptions.
Purchase price
All-in acquisition price including price + closing costs (typically 2–5% extra).
Typical range: $200k–$500k for single-family in most US metros; $600k–$1.5M in coastal cities.
Down payment %
Cash put down. Drives cash-on-cash dramatically — lower down = higher leverage = higher CoC if rent covers debt.
Typical range: 20–25% for investment property conventional; 15% on second-home loophole.
Monthly rent
Realistic market rent based on comparable units rented in last 6 months, not Zillow's algorithmic estimate.
Typical range: 0.5–0.8% of purchase price/month (1% rule rarely hits in 2026 outside Midwest cashflow markets).
Vacancy %
Share of months unoccupied. New landlords always under-estimate.
Typical range: 5–8% for hot rental markets; 10–15% for second-tier; 0% only if you have an iron-clad multi-year lease.
Operating expenses (% of rent)
Property tax + insurance + maintenance + capex reserve + property management + HOA + utilities.
Typical range: 40–55% of gross rent (the '50% rule'). Lower only if tenants pay utilities and you self-manage.
Mortgage rate %
Investment property rates run 50–100bp above primary residence.
Typical range: 6.5–8% for investment SFR in 2026.
Worked examples
Real scenarios with the math walked through line by line.
Midwest cashflow rental
Scenario: $220k duplex, 25% down ($55k), $2,400/mo rent, 7% vacancy, 48% OpEx, 7.25% rate on $165k.
Math: Annual gross rent = $28,800. Effective gross (after vacancy) = $26,784. NOI = $26,784 × (1 − 0.48) = $13,928. Cap rate = $13,928 ÷ $220k = 6.3%. Debt service = $1,126/mo = $13,512/yr. Annual cashflow = $416. Cash-on-cash = $416 ÷ $55k = 0.8%.
Outcome: Cashflow razor-thin. Deal depends entirely on appreciation + principal paydown. Plug in 3% appreciation and total return is ~8%/yr — competitive with stocks once you include leverage effect.
Sunbelt SFR, appreciation play
Scenario: $380k house, 20% down ($76k), $2,650/mo rent, 5% vacancy, 50% OpEx, 7.5% on $304k.
Math: EGI = $31,800 × 0.95 = $30,210. NOI = $15,105. Cap = 4.0%. Debt = $2,127/mo = $25,524/yr. Annual cashflow = −$10,419 (negative).
Outcome: You're paying $870/mo to own this. Only justifiable if you genuinely believe 6%+ annual appreciation will materialize. Most coastal/sunbelt 'investment' purchases at current rates work this way — explicit speculation, not income property.
Common mistakes
Where this calculation usually goes wrong in the real world.
- Skipping capex reserves. Roofs, HVAC, water heaters, and floors die on a 15–25 year schedule — budget 5–10% of rent monthly even if year 1 has zero repairs.
- Counting your own labor as free. If you self-manage, charge 8–10% of rent against the deal — it's the market rate you're consuming.
- Using gross yield instead of cap rate. A 6% gross yield on a property with 50% expenses is a 3% cap rate.
- Ignoring closing costs in cash invested. Title, inspection, loan origination, and reserves typically add 3–5% to your down payment.
- Modeling at 0% vacancy. Even great tenants eventually leave; turnover alone (paint, cleaning, marketing) typically costs 1 month of rent.
When to use this calculator
- Evaluating a specific deal before submitting an offer.
- Comparing 3–5 candidate properties on the same scoring system.
- Sizing a portfolio target — how many doors to hit a $50k/yr passive income goal.
- Stress-testing a property at 8% vacancy and +25% expenses to find the break-even rent.
- Deciding whether to refinance — re-run with new rate and updated rent.
Glossary
Cap rate
NOI ÷ purchase price. The unlevered yield. Compares deals apples-to-apples regardless of financing.
Cash-on-cash return
Annual pre-tax cashflow ÷ total cash invested (down payment + closing + initial repairs). The metric for leveraged returns.
NOI (Net Operating Income)
Rent minus all operating expenses, before debt service and depreciation.
1% rule
Heuristic that monthly rent should exceed 1% of purchase price for cashflow to work. Rarely achieved outside Midwest/rust belt at 2026 prices/rates.
DSCR
Debt Service Coverage Ratio = NOI ÷ annual debt service. Lenders for non-QM investment loans require ≥1.2.
More questions answered
Is real estate still a good investment in 2026?
It depends what you're buying. Cashflow markets (Midwest, parts of the South) still produce 6–10% cash-on-cash with 25% down at current rates. Coastal and high-growth Sunbelt markets are appreciation bets that frequently produce negative cashflow at today's rates — defensible only if you genuinely expect 5%+ annual appreciation. Don't conflate the two strategies.
How does this compare to investing in an index fund?
Honest comparison includes leverage. A 25% down rental getting 4% appreciation and 1% cashflow returns ~20% on equity when leveraged (4%/0.25 + cashflow + principal paydown). The S&P 500 returns ~10% unlevered. Real estate wins on leverage but loses on liquidity, time investment, concentration risk, and tail risk (one bad tenant or major repair can wipe out a year).
What's the biggest hidden cost?
Capex. Roofs ($8–20k), HVAC ($5–12k), water heaters ($1.5–3k), exterior paint ($5–10k), flooring ($3–10k per turn). Spread across a 20-year holding period, capex averages 8–12% of rent monthly. New landlords budget 0 in year 1 and get crushed in year 7.
Related guides
Long-form playbooks on the same topic, written by the RevenueLab editorial team.
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FAQ
What's a good cap rate for residential?
Stabilized residential cap rates run 4–6% in coastal cities and 7–10% in cashflow Midwest markets. Anything above 10% deserves extra scrutiny — usually means deferred maintenance, weak tenants, or a tough neighborhood.
What DSCR do lenders require?
Most DSCR / non-QM lenders require 1.20–1.25 minimum. Below 1.0 means the property doesn't cover its own debt service — you'd be feeding it cash each month.
How is this different from a mortgage calculator?
Mortgage calculators tell you the monthly P&I. This tells you whether the deal makes sense after all expenses, vacancy, and capex.
Does it work outside the US?
Yes — drop in your local price, rent, and interest rate. UK BTL, Canadian, Australian, and EU buy-to-rent all use the same NOI / cap rate framework.
Where do I get reliable rent comps?
Zillow Rent Zestimate, Rentometer, and recent listings on Zillow/Realtor.com are starting points. The single best data source is a local property manager — they'll tell you the actual rent in 5 minutes.
How this calculator is built
Independently maintained
Written by Sam Doshi and the RevenueLab editorial team. We don't sell the data feeds this tool is built on.
Sourced from primary data
Benchmarks come from public AdSense / Stripe / IRS disclosures and reader-submitted data — never third-party "$X per view" claims. Full methodology.
Last reviewed
June 2026. We re-check every figure on the platform on a rolling quarterly cycle.
Editorial standards
See our editorial policy and disclaimer. Results are estimates, not advice.