Is that rental property actually a good investment? Calculate your total return including rental yield, appreciation, tax benefits, maintenance, and financing costs.
Return on Investment (ROI) for real estate measures how much profit you make relative to the money you put in. It accounts for rental income, property appreciation, expenses like taxes and maintenance, and the leverage effect of your mortgage. A good rental property typically yields 8-12% annual ROI when factoring in appreciation.
Cap rate (capitalization rate) is the most common metric for comparing rental properties. It is calculated as Net Operating Income divided by the property purchase price. According to Zillow data, US cap rates typically range from 4% in high-demand urban markets to 10% or more in smaller cities. A cap rate above 6% is generally considered attractive.
Cash-on-cash return measures your actual cash flow relative to your cash invested (down payment plus closing costs). This metric accounts for mortgage payments and gives you a clearer picture of your annual yield. A cash-on-cash return of 6-8% is strong, while anything above 10% is excellent.
The total return includes both cash flow and appreciation. Historically, US residential real estate has appreciated at about 3-4% per year nationally (per the Case-Shiller Index), though local markets can vary widely. When combined with rental income and mortgage paydown, total returns can be competitive with stock market averages.
Related tools: Rent vs Buy Calculator, Cashflow Simulator, Compound Interest Calculator