Real Estate Tax Calc
The metrics that matter most
Three numbers anchor a rental comparison:
Cash-on-cash return: annual pre-tax cash flow divided by total cash invested (down payment + closing costs + immediate repairs). This measures yield on your actual out-of-pocket capital and is comparable across deals regardless of purchase price.
Cap rate: net operating income divided by purchase price. Useful for comparing unlevered returns and for assessing market pricing — but it ignores your financing terms and doesn't reflect your actual equity yield.
Gross rent multiplier (GRM): purchase price divided by annual gross rent. Quick to calculate; useful for screening but ignores expenses and vacancy.
For a serious side-by-side comparison, build a proforma for each property using the same assumptions for vacancy (typically 5–8%), expense ratio, and financing terms. Use the actual market rate for each property's financing — a lower-rate loan on Deal A may be worth more than the apparent difference in cap rates.
What deal structure changes the comparison
Two properties may look similar on cap rate but very different on cash-on-cash return if financing terms differ. A property requiring 25% down versus one where 20% is acceptable changes your invested capital and therefore your cash yield.
Don't overlook total return: cash flow + principal paydown + expected appreciation. A property with lower initial cash-on-cash in a growing market may generate higher total return over 10 years. Model both scenarios before deciding, especially if you're comparing a high-cash-flow stable market against a lower-yield appreciation market.
After-tax comparisons are the most accurate: depreciation deductions differ by purchase price, and properties with higher depreciable values produce larger paper losses that offset rental income. Run the after-tax cash flow for each deal if you're in a higher bracket.
A worked example
Deal A: $300,000 purchase price, 20% down ($60,000), $24,000 gross rent, $10,000 operating expenses, $9,600/year mortgage P&I, NOI = $14,000, cap rate = 4.7%, cash flow after debt service = $4,400, CoC = 7.3%.
Deal B: $450,000 purchase price, 25% down ($112,500), $36,000 gross rent, $16,000 operating expenses, $13,500/year P&I, NOI = $20,000, cap rate = 4.4%, cash flow = $6,500, CoC = 5.8%.
Deal A produces higher cash-on-cash return (7.3% vs. 5.8%). Deal B has more absolute cash flow ($6,500 vs. $4,400) and a larger property likely to appreciate more in dollar terms. Which wins depends on your goals: higher yield now (A) or absolute return and equity building (B).
Standardize the assumptions before you compare
The single biggest error in comparing deals is using different assumptions for each. If you allow Deal A a 5% vacancy rate and Deal B an 8% rate, or apply 8% management to one and self-manage the other, the comparison is meaningless — you are measuring your assumptions, not the properties. Lock in one consistent set: the same vacancy rate, the same management fee (even if you self-manage), the same CapEx reserve percentage, and the same expense-growth rate. Only then do the properties' real differences show through.
The exception is financing, which is genuinely property- and borrower-specific. It is fair to compare each deal on its actual available loan terms, because a lower rate or a smaller down payment is a real advantage that belongs in the analysis. Just be explicit about it: run each deal twice — once at identical financing to isolate property quality, and once at actual terms to see the deal as you would really do it.
Extend the worked example over a full hold
Return to Deal A ($300,000, 7.3% cash-on-cash) and Deal B ($450,000, 5.8% cash-on-cash). Year one favors A on yield. But project five years at 3% rent growth, 3% expense growth, and 3% appreciation. Deal B's larger price base means its 3% appreciation is $13,500 a year versus A's $9,000 — $4,500 more equity created annually from appreciation alone, before any principal paydown.
Add principal paydown: B's larger loan retires more principal in dollars each year than A's. By year five, B may have built substantially more total equity even though A threw off a higher cash yield the whole time. This is the crux of comparing deals: cash-on-cash measures near-term yield, while total return — cash flow plus paydown plus appreciation — measures wealth creation. The right choice depends on whether you need income now or growth over time.
Comparing total return, not just cash flow
A rigorous side-by-side computes each deal's total return, which has four components: pre-tax cash flow, principal paydown (the portion of each mortgage payment that reduces your loan balance), appreciation, and tax benefits from depreciation. Summing all four and dividing by cash invested gives a total return that often reorders a ranking based on cash flow alone.
The cleanest single number is the after-tax internal rate of return (IRR) over your expected hold, which accounts for the timing of every cash flow and the eventual sale. IRR properly credits a deal that returns capital sooner and penalizes one that ties your money up for years at a low yield. For a serious decision between two comparable properties, model both to an after-tax IRR rather than deciding on year-one cash-on-cash.
How taxes can flip the comparison
Two deals with identical pre-tax cash flow can deliver very different after-tax results. Depreciation is the driver: the deduction is based on the building's value, so a higher-priced property (or one with more of its value in the improvements rather than the land) generates a larger annual depreciation deduction. That larger paper loss shelters more income for an investor who can use it.
Whether you can use it depends on the passive activity loss rules. If your modified AGI exceeds $150,000 and you are not a real estate professional, rental losses are generally suspended and carry forward rather than offsetting your wages — so the after-tax edge from extra depreciation may be deferred, not immediate. When comparing deals at a high income level, model the depreciation benefit only to the extent the passive loss rules actually let you deduct it this year; otherwise you will overstate the after-tax return on the higher-basis property.
Beyond the numbers: risk and quality factors
Metrics do not capture everything that separates two deals. Consider the age and condition of major systems — a property with a new roof and HVAC carries less near-term CapEx risk than one with 20-year-old mechanicals, even if their proformas match. Consider location and tenant quality: a property in an appreciating, low-vacancy submarket carries less income risk than a higher-yielding property in a declining area. Consider liquidity: a standard single-family rental is far easier to sell than a specialized or rural property if you need to exit.
Tenant and lease profile matters too. A fourplex with four leases staggered through the year is more resilient to a single vacancy than a single-family home that goes to zero income the moment the tenant leaves. Fold these qualitative factors into your decision rather than letting a 1% difference in cash-on-cash return settle a choice between a durable asset and a fragile one.
A repeatable side-by-side scoring process
To keep comparisons disciplined, use the same worksheet for every deal. Enter identical assumptions for vacancy, management, repairs, and reserves; pull each property's actual taxes and insurance rather than estimates; and apply each deal's real financing. Then compute the full stack of metrics for both — cap rate, cash-on-cash return, DSCR, gross rent multiplier, and a five-year after-tax IRR — so you are never comparing one property on yield and the other on appreciation.
Finally, weight the metrics to your own goals before you decide. An investor who needs current income should weight cash-on-cash and DSCR most heavily; one building long-term wealth should weight total return and IRR. Write down the weighting in advance so a single flashy number does not sway the decision. The property that wins on your weighted scorecard, not the one with the highest headline rent, is the better deal for you.
Frequently asked questions
What is the best metric for comparing two rental properties?
Cash-on-cash return is the most comparable yield metric for properties with different prices and financing. Cap rate is better for unlevered market comparisons. Use both together.
Should I compare properties before or after tax?
Both. Pre-tax cash flow is a standard comparison; after-tax cash flow (accounting for depreciation deductions) can differ significantly between deals, especially at higher income levels.
How do I account for different financing terms when comparing two deals?
Standardize the comparison by running both deals at the same loan-to-value ratio, or compare each deal on its actual proposed terms. The second approach reflects reality; the first shows the underlying property quality independent of leverage.
Is a higher cap rate always the better deal?
No. A higher cap rate often signals higher risk — an older building, a weaker location, or less reliable tenants — not a bargain. Cap rate is a useful comparison only when the properties are genuinely similar in quality and risk. Between a stable property at a 6% cap and a distressed one at a 9% cap, the lower cap may well be the safer long-term investment.
Should I compare on IRR or cash-on-cash return?
Cash-on-cash is fine for a quick first screen of near-term yield. For a real decision, after-tax IRR over your expected hold is more accurate because it accounts for principal paydown, appreciation, taxes, and the timing of the eventual sale — the components that actually build wealth and that cash-on-cash ignores.
How do I compare a cash-flow market against an appreciation market?
Model total return, not just yield. High-cash-flow markets deliver more current income but often slower appreciation; high-appreciation markets do the reverse. Project both deals over your intended hold with realistic rent-growth and appreciation assumptions, sum cash flow plus paydown plus appreciation, and compare the after-tax totals rather than the year-one cash-on-cash figures.
Does a lower purchase price automatically mean a better deal?
No. A cheaper property with lower rents, higher expense ratios, or more deferred maintenance can easily produce a worse return than a more expensive, better-quality property. Compare the return metrics and total return, not the sticker price — the price only matters relative to the income and appreciation the property produces.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.