Estimate cash flow, cap rate, cash-on-cash return, and IRR for a rental property — year by year, over your full holding period.
A rental property's performance boils down to three related but distinct measures. Cap rate asks how the property performs on its own, ignoring financing entirely — net operating income divided by purchase price. Cash-on-cash return asks how your actual cash is performing, dividing the cash that lands in your pocket by the cash you put in. IRR ties it all together — the annualized return across the entire holding period, including the lump sum you'd receive from eventually selling.
Net operating income deliberately leaves financing out of the picture. Two investors could buy the identical property — one with cash, one with a large loan — and NOI would be the same for both, because NOI measures how the property itself performs, not how any particular buyer chose to pay for it. That's what makes it useful for comparing different properties on equal footing, regardless of financing.
Selling a property costs money — typically several percent of the sale price in agent commissions and closing costs — and a mortgage balance shrinks slowly in its early years. Sell too soon after buying, and those selling costs plus the still-large loan balance can outweigh both the equity built and the cash collected so far, producing a negative early return that gradually improves the longer the property is held.
It varies heavily by market and property type — a stable, low-risk market often has lower cap rates, while a higher-risk or less liquid market demands a higher one to compensate. There's no universal target; what matters is comparing it against similar properties in the same area.
Leverage. Financing most of the purchase with a loan means your cash investment is only a fraction of the property's price, so the same dollar of cash flow represents a much larger percentage return on that smaller amount of cash.
Only if you choose to model one — leaving it at 0% assumes you're handling tenant management, maintenance coordination, and administration yourself rather than paying a property manager.
Once the loan is paid off, the mortgage payment drops out of the cash flow calculation entirely — cash flow jumps because you're only covering operating expenses on a property you now own outright.
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