Should you buy a rental property?

A rental property is a small business with a mortgage attached. Whether it is a good one comes down to a handful of numbers, and the most important of them is easy to get wrong: what is left each month after every cost, not just after the mortgage.

The numbers, and what each one tells you

Net operating income (NOI) is the rent you actually collect less every cost of running the property: vacancy, management, maintenance, a reserve for big replacements, property tax, insurance and any HOA. It leaves out the mortgage, so it describes the property, not the deal.

Cash flow is NOI less the mortgage payment: what lands in your account each month, or leaves it.

Cap rate is a year's NOI divided by the price. Because it ignores financing, it is a way to compare properties with each other, not a return on your money.

Cash-on-cash return is a year's cash flow divided by the cash you put in at closing: the down payment plus closing costs. It is the return on your money, before tax and before any change in the home's value.

DSCR, the debt service coverage ratio, is NOI divided by the mortgage payments. Below 1, the property does not cover its own loan. Lenders that use it each define it their own way, so a lender's figure can differ from yours.

Break-even rent is the rent at which cash flow is exactly zero. The gap between it and the rent you expect is your margin for a bad year.

The rental property calculator works out all six and shows the formula behind each.

Why cash flow is often thin

Take a $320,000 house bought with 25% down at 7.25%, renting for $2,400 a month. The mortgage is about $1,637, and tax and insurance about $467. On those three bills alone the rent leaves roughly $296 a month.

Now count the rest. Allow 5% of the rent for vacancy, 10% of what you collect for a manager, 1% of the price a year for maintenance and 5% of the rent as a reserve for replacements. NOI falls to about $1,199 a month, and the property loses about $439 a month: a cap rate of 4.5%, a DSCR of 0.73 and a cash-on-cash return of about −6% on the $88,000 it takes to close. It breaks even at a rent of about $2,945.

Those allowances are assumptions, not measured figures, and the calculator lets you change each one. But leaving them out is how a rental that looks positive on paper turns out to cost money. A negative cash flow does not make the purchase wrong: the tenant is paying down your loan, and the home may appreciate. It does mean you are betting on those, and paying monthly to hold the bet.

Reserves, vacancy and management

Maintenance is the steady stream of repairs: a leaking faucet, a broken appliance, paint between tenants. Capital expenses are the large, lumpy ones, a roof or a furnace, that arrive on their own schedule. Setting money aside every month for both is what keeps one bad year from becoming a forced sale.

Vacancy is the rent you do not collect between tenants or while chasing an unpaid balance. Even a well-run property has some.

Management is optional if you live nearby and want the work. If you do not, a manager's fee comes off the top, and some charge separately for finding a tenant or overseeing repairs. Ask exactly what the fee covers.

Financing costs more for an investment property

Lenders treat a home you will not live in as riskier, and price it that way. Fannie Mae's Eligibility Matrix (5 August 2026) allows a purchase of a one-unit investment property with as little as 15% down, and two to four units with 25%, when underwritten through its automated system. Many lenders ask for more.

The price is higher too. Fannie Mae's Loan-Level Price Adjustment Matrix (30 September 2026) adds a charge for an investment property on top of the one every borrower pays for their credit score: 2.125% of the loan at 75% loan-to-value, and 4.125% at 85%. Lenders usually build it into a higher rate rather than charge it at closing, which is why investor rates run above the rates for a home you live in. Expect the lender to want cash reserves left over after closing as well.

The landlord's tax basics

Rent is income. IRS Publication 527: "In most cases, you must include in your gross income all amounts you receive as rent." Against it you deduct the expenses of running the property, including mortgage interest.

You also depreciate the building, not the land. Publication 527 describes residential rental property under "GDS, which has a recovery period of 27.5 years", and says plainly that "You can't depreciate the cost of land". Depreciation lowers your tax while you own the property and is recaptured when you sell; the guide on renting out or selling your house explains how that works.

Losses are limited. "Generally, rental real estate activities are considered passive activities and losses aren't deductible unless you have income from other passive activities to offset them." There is an exception: "If you or your spouse actively participated in a passive rental real estate activity, you may be able to deduct up to $25,000 of loss from the activity from your nonpassive income", with income limits Publication 527 sets out. How it all nets out depends on the rest of your return, so treat the calculator's pre-tax figures as the start of the analysis and take the tax side to a professional.

Before you buy

Check the rent against comparable homes actually rented, not listed. Price the insurance as a landlord policy. Get an investor rate quote, not a headline rate. And run the numbers at a higher vacancy and a lower rent than you hope for: if the property only works in a good year, it does not work.

If the rental you are weighing is your current home, kept when you move, the rent out or sell calculator compares keeping it with selling, including the tax-free window for a home you lived in.

Sources: IRS Publication 527 (2025), Residential Rental Property. Fannie Mae, Eligibility Matrix (5 August 2026) and Loan-Level Price Adjustment Matrix (30 September 2026). Cash flow figures computed with this site's own code.