About this calculator
Rental ROI captures the total return from owning a long-term rental — annual cash flow, plus principal paydown (renters pay the mortgage), plus appreciation over the holding period. Annualized as an IRR, this is often 2–3× the headline cash-on-cash return because most of the value comes from forced equity and price growth.
Four sources of return
- Cash flow — rent minus all expenses including mortgage. The "boring" number, but it’s what keeps you funded.
- Principal paydown — your tenant’s rent pays down the mortgage. Year 1 of a 30-year loan is heavy interest; by year 10–15, principal dominates.
- Appreciation — US average ~3–4% nominal long-term, but enormously variable by metro and decade. Leverage amplifies this dramatically.
- Tax benefits — depreciation deduction (27.5-year straight-line) shelters most cash flow from current tax. This calculator doesn’t model tax benefits explicitly.
Leverage and total ROI
On a $300k property with 20% down ($60k cash) and 3% appreciation: year-one appreciation is $9,000 — a 15% return on your $60k cash, just from appreciation alone. Add positive cash flow and principal paydown, and total ROI often clears 20% even in years when the headline cash-on-cash is 5–8%.
Why headline cap rates understate returns
A 5% cap rate property doesn’t produce 5% returns to a leveraged investor — they produce double-digit annualized IRR over a 7–10 year hold once you include appreciation and amortization. This is the math that pulls people into real estate vs index funds despite the operational headache.
Where the model breaks
Negative appreciation (the property loses value), unexpected major capex (HVAC + roof + plumbing in the same year), or a tenant disaster (extended vacancy, eviction costs). Always stress-test rental ROI at 0% appreciation; if it still works on cash flow alone, the appreciation upside is bonus, not foundation.