What this actually compares
Most rental-property calculators stop at cash flow: rent in, mortgage and expenses out, and a number at the bottom. That tells you whether the property feeds itself. It does not tell you whether buying it was a good use of the money, because it never asks what the money would have done somewhere else.
This model runs the obvious alternative alongside it. Both sides start with the same cash — your down payment plus closing costs. One buys the property. The other puts the whole amount in the market. Then, every month the property fails to pay for itself, the landlord writes a cheque and the investor contributes exactly the same amount. When the property throws off cash, the landlord invests it.
That matching rule is the whole point. Without it you are not comparing two uses of the same money, you are comparing two different amounts of money, and the answer is an artifact of the gap. The model checks the two lifetime totals against each other and refuses to report anything if they ever diverge.
Why leverage is the real story
A 25% down payment buys four dollars of property per dollar of your capital. Modest appreciation on the whole property becomes a large return on your slice of it, which is the thing that makes rentals compelling and the thing spreadsheets usually get right.
The same multiplier runs in reverse, and this is the part that gets left out. A fall in value is magnified against your equity in exactly the same proportion. Worse, the leverage is not optional: a portfolio can be left alone through a bad decade, but the mortgage payment is due every month whether the tenant pays or not. Set appreciation negative and watch what a 20% down payment does compared with a 60% one. That asymmetry is not a footnote to the comparison, it is the comparison.
The numbers landlords actually use
The summary reports the standard ratios, because they are how properties get screened and because each answers a different question:
- Cap rate — net operating income over the purchase price, ignoring the loan entirely. It describes the property, not your deal, which is what makes it comparable between buildings.
- Cash-on-cash — first-year cash flow over the cash you actually put in. This one does depend on the financing, and it is the number that tells you what the first year feels like.
- DSCR — net operating income over debt service. Below 1.0 the property does not pay for itself and the shortfall comes out of your pocket every month. Lenders care about this; owners discover it.
Note that net operating income is calculated before debt service. That is the convention, and it is why a property can have a healthy cap rate and still bleed cash: the cap rate does not know what you paid for the mortgage.
The costs people leave out
The fastest way to make a rental look good on a spreadsheet is to forget what running one costs. The defaults here include the things that are easiest to omit:
- Vacancy. Nobody collects twelve months of rent every year forever. Empty months between tenants, plus the tenant who stops paying, is the single input most often set to zero.
- A capital reserve, separate from maintenance. Routine repairs and the roof are different problems. The roof, the HVAC and the flooring arrive in lumps, years apart, and they arrive whether or not anyone budgeted for them. They are charged smoothly here, which spreads the cost rather than forgiving it.
- Management. Setting this to zero does not make the work disappear; it means you are doing it. The wage you are paying yourself for those evenings and weekends is not counted anywhere on this page.
Tax, and what is still missing
Tax is off by default, so the figures above are pre-tax until you switch it on. That default matters more here than on the other two calculators, because the tax treatment is a large part of the case for owning a rental at all.
Switched on, the model depreciates the building — not the land, which never depreciates — over 27.5 years, deducts interest and every operating cost as the business expenses they are, and then charges recapture at sale on every dollar of that depreciation, at a rate above the capital-gains rate. The shelter is a deferral, and part of it is repaid at a worse rate than it was taken at.
It also applies the passive activity loss limits, which is where most of the folk wisdom about rentals falls apart. A paper loss can only offset your salary through a $25,000 allowance that phases out between $100,000 and $150,000 of income — thresholds fixed since 1986 and never indexed. Above them the shelter is deferred, not granted.
Which way it nets out depends on income, and not in a straight line. On the default scenario tax favours investing at every income — the landlord pays recapture and capital gains at the end, and the shelter along the way does not cover it. But the size of that swing follows the allowance: about $1,800 at $125,000 of other income, where half of it survives and the bracket is high enough to make it worth something, against roughly $24,000 once it is gone above $150,000. That cliff is caused by nothing changing about the property at all, which is why it is worth computing rather than asserting.
Still missing: 1031 exchanges, cost segregation and bonus depreciation, real-estate professional status, and the step-up at death. Capital improvements are expensed with the capital reserve rather than capitalised. The methodology page lists every omission.