ReckonBoxThe three numbers a rental is judged by
Net operating income is the rent you actually collect less the cost of running the property, before any loan payment and before tax. Everything else follows from it. Cap rate divides NOI by the price and ignores financing, which is what makes it comparable between deals bought with cash and deals bought with debt. Cash on cash divides what lands in your pocket by what you put in.
On a $320,000 property renting for $2,950 with 6% vacancy and 8% management: NOI is $22,013.92, the cap rate is 6.88%, and after $19,646.68 of debt service the cash flow is $2,367.24 a year. Cash on cash comes to 2.52% on $94,000 invested. DSCR, which is NOI over debt service, is 1.12.
Those are the figures every ranked calculator returns. They're also incomplete.
What depreciation does to the answer
Depreciation is a deduction for the wearing out of the building, and because it costs nothing to claim, it separates what a rental pays you from what it reports. Per IRS Publication 527, residential rental property runs 27.5 years under the general depreciation system, straight line, with a mid-month convention. Land is excluded, because land doesn't wear out.
Split $334,000 of capitalised cost at 20% land and the depreciable basis is $267,200. Straight line over 27.5 years gives $9,716.36 a year.
| Year one on the default property | |
|---|---|
| Net operating income | $22,013.92 |
| Less mortgage interest | $17,323.82 |
| Less first-year depreciation | $9,311.52 |
| Taxable income | -$4,621.42 |
| Cash actually collected | +$2,367.24 |
The property hands you $2,367 and reports a $4,621 loss in the same twelve months. At a 24% marginal rate that loss is worth $1,109.14, which lifts cash flow after tax to $3,476.38 and cash on cash to 3.70%.
Depreciation isn't an exotic measure. Wikipedia's article on property investment calculators lists it, and tax savings from it, among the thirteen standard measures such a tool covers. Yet of the calculators ranking for this term, calculator.net, PropertyMetrics, SparkRental and Rentometer model no tax treatment at all. SparkRental says so plainly. Stessa names depreciation as a benefit of owning rental property and then, in its own words, doesn't calculate it into the return metrics.
One page we found does model it: WealthBuilders, which ranks for the broader real estate term, breaks out interest, depreciation and an estimated tax saved. It's the exception, and it prices no cap rate, cash on cash or DSCR alongside. Everything ranking for this term stops at 2.52% and calls that the return.
Two details that move the number
The month you buy changes year one, sometimes from a loss into a profit. The mid-month convention prorates the first year from the month the property became available to rent. January gets 11.5 months of the deduction; July gets 5.5.
Same property, bought in July: first-year depreciation falls from $9,311.52 to $4,453.33, and taxable income swings from a $4,621 loss to a $237 profit. Nothing about the building changed. No calculator in the fetched set asks when the property was placed in service.
Getting the land split wrong overstates the deduction every single year. Depreciate the full $334,000 and you'd claim $12,145.45 annually against a correct $9,716.36, an overstatement of $2,429.09. None of the fetched tools ask for a land allocation, so none of them could get this right. Your county assessor publishes a land and improvement split, which is where most people start.
Where the numbers come from
Effective gross income is scheduled rent less the vacancy allowance. Management is charged on collected rent, so it follows that haircut. Operating expenses add property tax, insurance, HOA, maintenance and management. NOI is what's left, and it deliberately excludes debt service, depreciation and income tax, which is the definition Omni and Wall Street Prep both use.
Cap rate is NOI over the purchase price. Cash on cash is pre-tax cash flow over the cash actually invested, meaning down payment plus closing costs plus upfront repairs. DSCR is NOI over annual debt service; PropertyMetrics cites 1.25 as a commonly quoted threshold, and requirements vary by lender.
Taxable income deducts mortgage interest but leaves principal alone, because only the interest is deductible, then subtracts depreciation on top. The interest figure is the actual first twelve payments, computed from the amortisation schedule rather than approximated.
What this deliberately does not do
This is a computation of tax mechanics, and it is not tax advice. It doesn't model passive activity loss limits, which govern when a rental loss can offset your salary and which catch most people. It doesn't model depreciation recapture when you sell, state income tax, the qualified business income deduction, or cost segregation. It also doesn't forecast appreciation, because nobody can, and a calculator that projects it is presenting a guess as a return.
A rental that shows a tax loss is not automatically a loss you can use this year. Talk to a CPA or a tax adviser about your own return before treating any of this as settled.
Frequently asked questions
What is a good cap rate on a rental property? Cap rate is net operating income divided by the property value, and it deliberately ignores the loan, which makes it comparable between deals financed differently. On the default figures, $22,013.92 of NOI against a $320,000 price gives 6.88%. What counts as good depends on the market and the risk, so the number is a comparison tool and not a threshold.
What is the difference between cap rate and cash on cash return? Cap rate is unlevered and cash on cash is levered. Cap rate divides NOI by the price and ignores financing entirely; cash on cash divides the pre-tax cash flow, after debt service, by the cash you actually put in. The same property here shows a 6.88% cap rate and a 2.52% cash on cash return, and the gap between them is the mortgage.
How is rental property depreciation calculated? Per IRS Publication 527, residential rental property is depreciated over 27.5 years using the straight line method and a mid-month convention, and land is excluded because it does not wear out. On a $334,000 capitalised cost with 20% land, the depreciable basis is $267,200 and the full-year deduction is $9,716.36.
Why does my rental show a loss when it pays me cash? Because depreciation is a deduction that costs nothing to claim. The default property collects $2,367.24 of cash in a year while reporting taxable income of minus $4,621.42, once $17,323.82 of mortgage interest and $9,311.52 of first-year depreciation come off the $22,013.92 of NOI. Passive activity rules limit when such a loss offsets other income, so ask a tax professional what applies to you.
Does the month I buy change my depreciation? Yes, and it can flip year one from a loss to a profit. The mid-month convention prorates the first year, so a property placed in service in January gets $9,311.52 of depreciation while the same property placed in service in July gets $4,453.33. That moves taxable income from a $4,621 loss to a $237 profit on otherwise identical figures.
Why do I need to split out the land value? Because land is not depreciable and getting the split wrong changes the deduction every year. Depreciating the whole $334,000 instead of the building alone gives $12,145.45 a year against the correct $9,716.36, an overstatement of $2,429.09 annually. Your county assessor publishes a land and improvement split, which is the usual starting point.
What does DSCR mean and what do lenders want? DSCR is net operating income divided by annual debt service, so it measures how many times the property covers its own loan payments. The default figures give 1.12, meaning NOI exceeds debt service by 12%. PropertyMetrics notes 1.25 as a commonly cited threshold, and requirements vary by lender and loan programme.