How it works

Tutorial

Investment property analysis requires professional calculation considering cash flow, value increases, financing, tax benefits, and risk – far beyond the amateur approach of “rent minus mortgage equals profit.” Professional investors calculate multiple metrics: cash-on-cash return (return on your equity with financing), cap rate (property performance without financing), total return (all benefits combined), IRR (time-adjusted return), and cash flow stability. A property showing 8% cap rate but 15% total return after tax benefits and leverage might be excellent, while a 10% cap rate with negative cash flow and high vacancy risk could be terrible.

Understanding complete property ROI prevents expensive mistakes. Many investors buy properties with negative cash flow hoping value increases bail them out, only to face foreclosure when job loss eliminates their ability to cover the gap or markets stagnate. Others pass on positive cash flow properties in “boring” markets that actually deliver superior risk-adjusted returns. This calculator applies professional analysis – similar to what large real estate funds use – to evaluate properties based on financial merit rather than emotion, helping build wealth through data-driven decisions.

The Key Metrics

Step-by-Step Example

Property Details:$350,000 triplex, $70,000 down (20%), $3,200 monthly total rent, $2,150 mortgage payment, $10,200 annual expenses, 4% vacancy rate, 3% annual value increase, 28% tax bracket

Step 1: Calculate Net Operating Income

Step 2: Calculate Cash Flow and Basic Returns

Step 3: Calculate Total Return (All Benefits)

What This Means

This triplex requires $573/month out-of-pocket to own (-8.9% cash-on-cash), making it unsuitable for investors without emergency savings or stable income. However, total return is strong at 17.9% annually when including value increases ($10,500), mortgage paydown ($4,644), and tax benefits ($5,488). The property fails the 1% rule (0.91% vs 1.0% target), indicating it’s in an expensive, low-yield market – typical of coastal cities where investors accept negative cash flow betting on value increases.

The 5.4% cap rate is low, suggesting either the property is overpriced or it’s in a premium location with lower risk and reliable value increases. This property only makes sense if: 1) You have cash reserves to cover the negative $573/month, 2) You believe 3%+ value increases will continue, 3) You value forced savings via mortgage paydown, and 4) You can use tax losses against other income.

If value increases drop to 1%, total ROI falls to 8.8% – barely better than stocks with far more concentration risk and work. A better deal for most investors would show positive $300-500/month cash flow even with lower value increases, providing safety and income instead of requiring monthly subsidies. Match your investment to your financial situation: negative cash flow properties suit high-income investors betting on appreciation, while positive cash flow properties suit income-focused investors seeking stability.