Total Return on a Rental Property: The Four Sources
The full picture of what you made on a property over time: cash flow collected plus equity gained, both from loan paydown and from appreciation. Cash-on-cash return alone only counts the first piece.
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Total return is everything a rental property earns you in a year, not just the cash it puts in your account. It has four components, and most first-time investors only count the first.
The four sources
- Cash flow: rent minus every expense and the mortgage
- Loan paydown: the principal portion of each payment, which is yours
- Appreciation: any increase in the property's value
- Tax benefits: chiefly depreciation, which shelters income
An example
A US$150,000 house, 20% down (US$30,000), US$6,000 closing costs, so US$36,000 in. Over year one:
| Source | Amount |
|---|---|
| Cash flow | US$1,050 |
| Loan paydown | US$1,290 |
| Appreciation at 3% | US$4,500 |
| Depreciation shelter (at 24%) | US$1,090 |
| Total | US$7,930 |
Against US$36,000 invested, that is about 22%, against a cash-on-cash return of just 2.9% on the same deal.
Why the distinction matters
The two numbers answer different questions. Cash-on-cash is what you can spend, and it is what determines whether you can hold the property through a rough patch. Total return is what you are actually accumulating.
A deal with thin cash flow and strong total return is still a real investment. But you cannot pay a furnace bill with appreciation, which is why screening on cash-on-cash first and treating total return as the fuller picture is the right order.
Treat the components differently
Cash flow and loan paydown are close to certain: they follow from the rent, the expenses and the amortisation schedule. Appreciation is a forecast, and the single most over-assumed figure in real estate. Tax benefits depend entirely on your own situation and are a question for an accountant, not a calculator.
A sound approach is to underwrite on cash flow and paydown alone, and treat appreciation as upside you did not pay for.
Related reading
The calculator handles the cash flow and paydown side. For the tax component, US rental income tax for Canadians covers the cross-border case; anywhere else, ask an accountant.
Longer reads on this
Related terms
Run the number on a real listing
The free calculator works out cash-on-cash return, cap rate and DSCR from a price and a rent.