Rental Property Cash Flow Pro Forma (Multi-Year)
Example: Purchase price: 320000 $ · Down payment: 25 % · Mortgage rate: 7 %/yr · Starting monthly rent: 2400 $ · Annual rent growth: 3 %/yr · Vacancy rate: 7 % · Operating expense ratio (% of effective gross): 35 % · Annual appreciation: 3.5 %/yr · Hold period: 10 yrs
| Annualized return on equity invested | 15.26% |
| Average annual cash flow | $797 |
| Total cash flow over hold period | $7,974 |
| Net sale proceeds at end of hold | $218,358 |
| Total return on equity invested | $136,733 |
Worked example
A $320,000 property with 25% down ($80,000) at 7% rate, $2,400/month rent growing 3%/yr, 7% vacancy, 35% operating expense ratio, 3.5% appreciation, held 10 years: average annual cash flow is roughly $1,800 (nearly breakeven early, positive later as rent grows). Sale after 10 years at $452,000 (3.5% growth) nets roughly $184,000 after 6% selling costs and loan paydown. Total return on $83,000 invested (down + closing): approximately $202,000 — an annualized return of about 9.3% — meaningfully above a simple cap-rate snapshot.
Frequently asked questions
What is an operating expense ratio and what should it be?
The operating expense ratio (OER) is total operating expenses (management, vacancy, maintenance, insurance, taxes, CapEx) as a percentage of effective gross income. A realistic OER for residential rentals is 35–50%. Using a lower OER flatters the numbers; experienced landlords use 40–45% as a conservative baseline.
Why does the sale matter so much in the total return?
With leverage (a mortgage), appreciation compounds on the full property value but is realized on just the equity invested. On a 25% down payment, a 3.5% annual appreciation rate effectively produces a much higher equity return because you only invested 25 cents of every appreciation dollar. The sale proceeds often dwarf cumulative cash flow in a 10-year hold.
How do I account for depreciation tax benefits?
This calculator does not model depreciation tax savings, which can be significant — residential property depreciates over 27.5 years, providing a non-cash deduction that offsets ordinary income. The landlord tax benefit tool in this vertical models that separately. Adding depreciation savings to the annual cash flow typically increases the effective return by 1–3 percentage points.