- What's the difference between cap rate, cash-on-cash, and total ROI?
- All three measure return, but on different bases. Cap rate = NOI ÷ property price; ignores financing, useful for comparing the property as an asset. Cash-on-cash = year-1 cash flow ÷ cash invested; the leveraged return on the actual check you wrote. Total ROI = (cumulative cash flow + equity gain at sale) ÷ cash invested over the full hold period; the only one that captures appreciation and principal paydown. A property can have a low cap rate, a thin cash-on-cash, and still produce a strong total ROI if appreciation and rent growth are kind to it.
- Why is the annualized return so often below the S&P 500?
- Because residential rental yields haven't kept pace with mortgage rates, and because real estate has to clear a higher bar than a passive index to justify the work. At 7% mortgage rates and 25% down, a 5% cap rate property has its leveraged cash flow eaten by debt service. The annualized return then depends almost entirely on appreciation — which is highly market-dependent and not guaranteed. The S&P 500 averages ~10%/year long-term with no tenants, no toilets, no roof replacements. Real estate's edge has to come from leverage, tax advantages (depreciation, 1031), or operational alpha (forced appreciation, value-add). A 6-7% annualized return on a leveraged rental is roughly even with the index after accounting for work and risk.
- How does this calculator handle appreciation and rent growth?
- Both compound annually from your inputs. Rent grows by your 'annual rent appreciation' rate each year (default 2%). Property value grows by your 'annual appreciation' rate (default 3%). Maintenance and capex reserves track property value, so they grow with it. Property taxes, insurance, and HOA grow at the rent appreciation rate as a proxy for general operating inflation. These are assumptions, not guarantees — and they're the two biggest swing inputs. Drop appreciation to 0% and see what happens to your annualized return; that's your downside case.
- What is the annualized return — is it a true IRR?
- No. It's a CAGR approximation: ((1 + totalROI)^(1/years)) − 1. It compounds the total return evenly across the hold period. A true IRR would weight cash flows by when they arrived — money in year 1 is worth more than money in year 5 because you can reinvest it. For most screening decisions the CAGR approximation is within 0.5-1.5 percentage points of the IRR and good enough to decide whether a deal is worth a closer look. Before signing anything, run a proper DCF in a spreadsheet that respects the timing of every cash flow.
- What does this NOT account for?
- A few significant items. Depreciation tax shield — IRS lets you deduct ~3.636% of building value per year, which can convert a low-CoC property into a meaningfully higher after-tax return; not modeled here. Mortgage interest deduction — capped post-2017 TCJA but still relevant for many buyers. Capital gains tax at exit — long-term cap gains plus state, partially offset by 1031 exchange. Refinancing options mid-hold. Local rent-control laws that cap your rent appreciation input. Capex surprises (a $15k HVAC failure in year 3). Insurance premium spikes from climate risk. The calculator is pre-tax, gross of refinancing, and assumes your inputs hold steady — none of which are guaranteed in the real world.
- Why does the calculator surface a breakeven rent?
- Because the rent assumption is the single most fragile input in any rental pro forma. A landlord who needs $2,500/mo to break even is one bad market cycle away from negative cash flow. Knowing the breakeven up front lets you stress-test: how much rent cushion do you have? A 20% cushion (breakeven is 80% of market rent) is comfortable. A breakeven equal to market rent means any vacancy or rent drop tips you negative. The breakeven is computed by solving cash flow = 0 in closed form, so it's an exact number rather than a guess.
- How should I set vacancy, maintenance, and capex assumptions?
- Conservatively. Vacancy: 5% is a reasonable residential default; raise to 8-10% for short-term lets or transient markets, drop to 3% for class-A urban product. Maintenance: 1% of property value per year is the rule of thumb; old homes (pre-1960) realistically run 1.5-2%. CapEx reserve: 1% of property value per year escrows for big-ticket replacements (roof, HVAC, water heater, appliances) that average out over 15-30 years. Sellers' pro formas almost always understate all three. If the numbers only work with aggressive opex assumptions, the deal doesn't actually work.
- Can total ROI be negative?
- Yes — and the calculator displays the sign explicitly. Negative total ROI happens when cumulative cash flow plus equity gain is less than cash invested. Common causes: negative cash flow over multiple years (rent doesn't cover mortgage + opex), zero or negative appreciation, and high selling costs at exit. Heavy leverage amplifies losses just as it amplifies gains; a property that loses 10% of value with 80% LTV can wipe out the entire down payment plus closing costs. If the calculator shows a negative total ROI under realistic assumptions, the deal is not viable.
