What a Rental Actually Has to Cover

Rental real estate looks simple on the surface: collect rent, pay the mortgage, pocket the difference. In practice, a rental has to cover a long list of line items before it produces real cash, and a deal that pencils out on the back of a napkin often turns negative once you run the full math. This calculator pushes you through every category that matters: debt service, taxes, insurance, HOA, property management, maintenance, capital expenditures, and vacancy. The output is an honest picture of monthly cash flow, annual cash flow, cash-on-cash return, and cap rate. If a property cannot cover all of those expenses and still leave cash in your pocket, it is not a rental, it is a hobby.

The Four Numbers That Matter

Every rental underwrite comes down to four metrics. Each one answers a different question, and using only one of them is how investors get fooled.

NOI (net operating income) is the property's income after operating expenses but before the mortgage. Cash flow is what is left after the mortgage. Cash-on-cash tells you the return on the cash you actually put in, including down payment and closing costs. Cap rate tells you the return if you paid all cash, which is how properties are compared across different financing structures.

A property with strong cap rate but weak cash-on-cash is usually over-leveraged. A property with strong cash-on-cash but weak cap rate is often cheaply bought but in a soft market. Both numbers together tell the story.

A Worked Example

Say you are looking at a $300,000 single-family rental. You put 25% down ($75,000), plus $6,000 in closing costs, for a total of $81,000 cash in. The loan is $225,000 at 7% over 30 years, giving you a monthly principal-and-interest payment of about $1,497. Rent is $2,400 per month.

• Gross annual rent: $2,400 × 12 = $28,800
• Vacancy allowance (5%): $1,440
• Effective gross income: $27,360
• Operating expenses (taxes, insurance, maintenance, capex reserves, management at ~40% of gross): about $11,500
• NOI: $15,860
• Annual debt service: $1,497 × 12 = $17,964
• Annual cash flow: $15,860 − $17,964 = negative $2,100
• Cap rate: $15,860 ÷ $300,000 = 5.3%
• Cash-on-cash return: negative, since cash flow is negative

On paper this looks like a solid rental at a reasonable cap rate, but once you layer on today's higher mortgage rates, the cash flow is negative. This is exactly why rate-sensitivity matters. A 1% drop in rate on that same loan would swing the monthly payment by about $150, pushing the deal back into positive territory.

The 1% Rule, the 50% Rule, and Why They Exist

Two rules of thumb come up constantly in landlord conversations. They are not meant to be precise, but they are useful filters for knowing whether a property is worth running the full underwrite.

The 1% rule: Monthly rent should be at least 1% of the purchase price. A $200,000 house should rent for at least $2,000 a month. Most markets in the US no longer support the 1% rule at full list price, which is why investors have shifted toward off-market deals, value-add strategies, and secondary markets where prices remain low enough for rents to catch up.

The 50% rule: On average, operating expenses (not counting the mortgage) eat up about 50% of gross rent over the long run. This accounts for vacancy, maintenance, capex, management, taxes, and insurance. If a pro forma shows expenses at only 20% of rent, the underwriter is probably missing something. The 50% rule is a sanity check, not a formula.

Both rules break down in specific contexts: high-tax states push expenses above 50%, luxury markets push rent ratios below 1%, and new construction pushes maintenance reserves down early. Use them as starting points, not endpoints.

Common Mistakes to Avoid

• Forgetting capital expenditures. Roof, HVAC, water heater, appliances, and flooring all wear out. If you are not reserving roughly 5 to 10% of gross rent for capex, your cash flow is overstated and you will be blindsided when the AC dies in July.
• Undercounting vacancy. Even in strong markets, units turn over. Budget at least 5% vacancy, and in higher-turnover markets (college towns, luxury rentals) 8 to 10%.
• Using optimistic rent comps. Listing rents and actual leased rents diverge. Pull recent closed leases, not list prices, and discount for any units that have been sitting on the market.
• Ignoring property management. Even if you self-manage, include an 8 to 10% management line. Your time is worth something, and if you ever sell or scale up, the next owner will underwrite with management included.
• Skipping property taxes in the first year. Many states reassess at the sale price, so the seller's old tax bill will jump significantly after closing. Underwrite based on the reassessed figure, not the current one.
• Treating appreciation as cash flow. Appreciation is a balance-sheet gain, not a cash-in-pocket return. It is real, but it does not pay your bills or cover a surprise expense.

Frequently Asked Questions