How to Analyze a Rental Property: Cash Flow, Cap Rate and ROI

Published October 12, 2026

Free tool: Real Estate Investment Calculator→

A rental property earns money in three ways: rent left over after the bills, the tenant paying down your mortgage, and the property gaining value. A good analysis looks at all three, and at the cash you have to put in. This guide walks through the key numbers with a worked example, using the free Real Estate Investment Calculator.

The numbers investors use

• Monthly cash flow: rent minus the mortgage payment and operating expenses.
• Cap rate: net operating income (rent minus operating expenses, before the mortgage) ÷ the price. It compares properties regardless of how they're financed.
• Cash-on-cash return: the first year's cash flow ÷ the cash you put down.
• Total profit and annualized ROI: equity built plus cash flow, compared with the cash you invested, over the years you hold the property.

Example: a $300,000 rental

A $300,000 property with 20% down ($60,000), a 4.5% 30-year mortgage, rent of $2,000 a month and operating expenses of 40% of the rent ($800) for taxes, insurance, maintenance, vacancy and management:

• Mortgage payment: $1,216
• Monthly cash flow: −$16, so you cover a small shortfall each month
• Cap rate: 4.8%
• Cash-on-cash return: −0.3%

Over 10 years with 3% yearly appreciation, the property is worth about $403,175. Your total profit is $149,035 on $61,925 invested (the down payment plus the shortfalls), an annualized return of 13.0%.

Most of that return comes from appreciation and the loan being paid down, not from rent. That makes the result very sensitive to the price-growth assumption.

How the mortgage rate and rent change the picture

• Rent of $2,400 at 4.5%: cash flow turns positive at about $224 a month, the cap rate rises to 5.8%, cash-on-cash is 4.5%, and the 10-year annualized return is 14.8%.
• Rent of $2,400 at 6.5%: the mortgage payment jumps to $1,517, cash flow is about −$77 a month, and the annualized return falls to 11.2%.

A quick screening rule says monthly rent should be at least 1% of the price. $2,000 on $300,000 is only 0.67%, which is why the example barely breaks even.

What to include in expenses

Underestimating expenses is the most common mistake. Budget for property tax, landlord insurance, repairs and maintenance (often 1% to 2% of the value a year), vacancy, property management if you use it, HOA fees and big future replacements such as a roof. A common rule of thumb is that operating expenses run close to half the rent.

The calculator also leaves out closing and selling costs, income taxes and depreciation, so treat the result as a first estimate before a full analysis.

How to use the Real Estate Investment Calculator

1. Open the Real Estate Investment Calculator.
2. Enter the property price, your down payment, the interest rate and the loan term.
3. Enter the monthly rent and the yearly expenses as a percentage of the rent.
4. Enter the expected appreciation and how many years you'll hold the property.
5. Read the results: the monthly mortgage, the monthly cash flow, the annualized ROI, the cap rate, the cash-on-cash return and the total profit, with a growth chart, a breakdown of the final property value into equity and loan, and a yearly table.

To compare the return with other investments, see How to Calculate ROI.

Frequently asked questions

What is a good cap rate for a rental property?

It depends on the market and the risk. Cap rates often run about 4% to 6% in prime urban markets and 8% to 12% in secondary markets; higher cap rates mean more income for the price but usually more risk.

What is the difference between cap rate and cash-on-cash return?

Cap rate ignores financing and compares the property's income with its price. Cash-on-cash return measures your cash flow after the mortgage against the cash you actually put in.

Can a property with negative cash flow still be a good investment?

It can make money through appreciation and loan paydown, as in the example, but you have to cover the shortfall every month, and the return depends heavily on prices rising.