Cash-on-cash says 3.73%. The same deal returned 65.66%.
A $300,000 property is bought with 20% down at 6.5% over 30 years, plus $9,000 closing and $6,000 renovation. It rents for $30,000 a year with $9,000 of operating expenses, appreciates 3.5% a year, and is sold after 5 years with 6% selling costs.
Cash invested: $60,000 + $9,000 + $6,000 = $75,000. Annual cash flow: $30,000 − $9,000 − $18,204 mortgage = $2,796. Value after 5 years: 300,000 × 1.035⁵ = $356,306. Loan paid down: 240,000 − 224,666 = $15,334. Net sale proceeds: 356,306 − 21,378 − 224,666 = $110,261.
Total profit: $110,261 + $13,982 − $75,000 = $49,243 — a 65.66% total return, or 10.62% compounded annually. The composition is what the headline hides: only $13,982 is rental cash flow, $15,334 is loan paydown, and roughly $34,928 is appreciation net of selling costs. Cash-on-cashThe annual cash income from a property, measured against the actual cash you put into it. divides year-one cash flow by cash invested and stops there, at 3.73%, so it prices one of the three ways this property paid.
Each mortgage payment repays part of the loan, converting debt into equity you own. Over years this builds real wealth even if cash flow is modest, so a return that ignores paydown understates how much the property earns. Read the composition before you reject a deal: low cash-on-cash and strong total ROI is what a paydown-and-appreciation property looks like.
65.66% over five years is 10.62% a year, not 13.13%
Lead with annualized ROI. Total ROI is the whole profit over the holding period as a percent of cash invested; annualized converts it to a yearly compound rate, which is the fair way to compare investments of different lengths. Dividing total ROI by the number of years overstates the annual figure and should be avoided: 65.66% split five ways reads 13.13%, well above what the money actually compounded at.
There is no fixed target for a good return. It depends on your market, leverage, and risk tolerance, so compare the annualized figure against alternatives like index funds rather than a fixed target. Many investors want a compound annual return that clearly beats a low-cost stock index to justify the extra work and risk of direct property.
Appreciation is 71% of this deal’s profit and the input you know least
Of the $49,243 profit above, $34,928 is appreciation net of selling costs: about 71%. It moves the result because it applies to the whole property value while you only invested the down payment, so leverage magnifies it. That also makes it the riskiest input: lower the appreciation rate and watch how quickly the return falls, since prices can decline as well as rise.
A return leaning almost entirely on appreciation is more speculative than one with solid cash flow, even at the same headline ROI. Stress-test it: re-run at a rate a point or two below your assumption, and check that assumption against the house-price series cited below. That risk heads the limitations below.
- Appreciation is the largest and least certain component; a small change in the rate moves the result a lot.
- Annualized ROI is sensitive to the holding period and to selling costs at exit.
- The model excludes taxes, refinancing, and major unplanned capital costs.
- This is an educational estimate, not investment, tax, or lending advice.
The 2% rule screens a deal in ten seconds. This prices it.
A quick screening heuristic: if monthly rent is at least 2% of the purchase price (e.g. $2,000 rent on a $100,000 property), the deal likely cash-flows well before running the numbers. The property above fails it outright, at $2,500 a month on $300,000, or 0.83% — and still compounds at 10.62%. It is a rough filter for cheaper markets, not a substitute for this calculator: high-priced markets rarely hit 2% yet can still be excellent investments once appreciation and leverage are counted.
Pre-tax, fixed-rate, year-one rent: what this model holds still
Total profit here is before income tax, capital-gains tax, and any depreciation recapture, all of which vary by country and personal situation. Treat the result as a pre-tax comparison and consult a tax professional for your after-tax return. Four further things are held still:
- The mortgage is a standard fully-amortizing fixed-rate loan held for the whole period.
- Rent, expenses, and the appreciation rate are steady; real markets are cyclical and can fall as well as rise.
- Total profit is before income tax and any depreciation recapture, which vary by jurisdiction.
- Cash flow is held at the year-one figure for clarity; rising rents would increase the return.
Currency is not one of them. Keep every input in one currency and the percentages and amounts are valid anywhere. What this does not do is localize the defaults, so replace the appreciation, cost, and expense figures with your own market’s before you trust the result.
Sources and methodology
The returns here are built from your own purchase, financing, rent and expense figures, before income tax and depreciation recapture. The sources below establish what counts as rental income and a deductible expense, what happens to depreciation at sale, the loan structure assumed, and the published house-price series to check an appreciation assumption against. Links open in a new tab.