Rental Property Yield Calculator: Cap Rate, Gross Yield, and Cash-on-Cash Return

Cap rate, gross yield, and cash-on-cash return

Cap rate is the property's pure yield without leverage. It compares annual net operating income (rent minus operating expenses) against the purchase price. A 7 percent cap rate means the property generates 7 percent of its purchase price each year in unlevered cash flow. Cap rate is the right metric for comparing properties at different price points and in different markets; it strips out the question of how the deal is financed.

Gross yield is the cruder version: annual rent over purchase price. It is easier to compute but ignores operating costs, which can vary from 25 percent of rent for newer single-family homes to over 50 percent of rent for older multifamily properties needing significant maintenance.

Cash-on-cash return introduces leverage. It is the annual cash flow (NOI minus annual debt service) divided by the cash actually invested (typically the down payment plus closing costs). Cash-on-cash can be much higher than cap rate when leverage is favorable (rates below the cap rate) and can be negative when leverage is unfavorable (rates above the cap rate). At 6.5 percent mortgage rates and 7 percent cap rates the cash-on-cash advantage of leverage is modest; at 9 percent rates and 6 percent caps, leverage actively hurts.

The 1 percent rule and the 50 percent rule

Two rules of thumb that investors use to filter deals quickly. The 1 percent rule says monthly rent should be at least 1 percent of purchase price; a $300,000 property should rent for at least $3,000 a month to be worth considering. This filter ruled out almost all coastal markets even before the post-2020 price rises and is now hard to find even in midwest markets. The 50 percent rule says half of gross rent goes to operating expenses (excluding debt); it is a conservative reserve assumption that helps avoid the trap of underestimating maintenance and capex.

This calculator does not enforce either rule; you input the actual rent and expenses and see the resulting yields. Use the rules as fast screens before bothering to enter detailed numbers for a specific property.

Where vacancy and expense assumptions go wrong

The two most common ways rental analyses fail are underestimating vacancy and underestimating capital expenditure reserves. Vacancy of 5 percent is reasonable for a stable single-family rental in a strong market; properties in declining markets or properties with frequent tenant turnover can easily see 10 to 15 percent vacancy.

Capital expenditures (capex) like roof replacement (every 25 years), HVAC (every 15), water heater (every 10), and major paint or flooring (every 7 to 10) average about $200 to $400 per month for a typical $300k single-family, but are often spent in lumps every few years. Beginning investors who ignore capex reserves see their cash flow disappear when the first major repair hits. The calculator's annualExpenses input should include a reasonable capex reserve; if you have not been allocating for capex, increase your annualExpenses to a realistic figure before running the math.

How leverage interacts with returns

Mortgage leverage amplifies both gains and losses. A property bought all-cash at a 7 percent cap rate produces a 7 percent cash-on-cash return regardless of property appreciation. The same property bought with 25 percent down and a 6.5 percent mortgage produces a higher cash-on-cash return (because the cap rate exceeds the borrowing rate) but a much higher sensitivity to rent decline; a 10 percent rent drop on a leveraged property can wipe out cash flow entirely while the unlevered owner still cashes meaningful checks.

The calculator shows both the unlevered cap rate and the levered cash-on-cash so you can see the leverage effect directly. As mortgage rates have climbed since 2022, the leverage advantage has shrunk meaningfully; cash buyers in the current market often achieve similar cash-on-cash returns as 25-percent-down buyers, with much less risk.

What this calculator does not include

Depreciation tax shield (the IRS-allowed annual deduction of 27.5-year residential property depreciation, which can significantly raise after-tax cash-on-cash). Mortgage principal paydown (which builds equity but does not show in cash flow). Property appreciation (which is the bigger driver of long-term returns in many markets). Closing costs (typically 2 to 5 percent of purchase price). Refinance scenarios. 1031 exchange tax deferral. State and local rental regulations (rent control, eviction limits, registration fees). For a comprehensive analysis, build a full cash-flow model that includes depreciation and appreciation; this calculator is meant for fast triage of whether a deal pencils on basic cash-flow terms.