Rent vs Buy as an Investment Property: Landlord Math Explained
Home Price
$400K
Monthly Rent
$2,000
Down Payment (20%)
$80K
Est. Break-Even
4 yrs
Buying a property as an investment (rental) has completely different math than buying as a primary residence. Key metrics: (1) Cap rate = (annual rent - expenses) / property price; (2) Cash-on-cash return = annual cash flow / cash invested; (3) Total return = cash flow + appreciation + mortgage paydown.
On a $400K rental property with $2,000/month rent (assuming 20% down, 6.75% rate): monthly mortgage ~$2,090, property taxes ~$367, insurance ~$133, maintenance ~$333, vacancy ~$100, property management ~$200 = ~$3,223 in total expenses vs $2,000 in rent. This is negative cash flow of ~$1,223/month — common in HCOL markets today at 6.75% rates.
The case for buying investment property anyway: appreciation + mortgage paydown. A $400K property at 3.5% appreciation gains $14,000/year, and tenants pay down ~$5,000/year in principal — total equity gain ~$19,000/year on a $80,000 cash investment = 24% total return before cash flow losses. With $14,700/year negative cash flow, net return is ~$4,300/year = 5.4% return. Compare to 7% stock returns — stocks win slightly but with no leverage.
Rental property becomes more attractive in lower-priced markets (Detroit, Cleveland, Memphis, Indianapolis) where cap rates are 6–10% and properties actually cash flow positively. A $120K property renting for $1,100/month with $700/month in expenses nets $400/month = 4% cash-on-cash return, plus appreciation and paydown. This is why "fly-over state" real estate dominates FIRE investing discussions.