Real Estate ROI: How to Calculate Return on a $420,000 Rental Property in 2026
A $420,000 rental at $2,800/mo yields a 4.6% cap rate but negative cash flow. Here's the full ROI math — cap rate, cash-on-cash, and total return calculated.
Disclaimer: Tax figures reflect estimated 2026 projections based on IRS Publication 15-T. Tax law changes frequently. Verify with a CPA or the IRS Tax Withholding Estimator. Calcwyse.com is not a tax advisor.
On a $420,000 rental with 20% down and $2,800/month rent, your cap rate is 4.6% — but your cash-on-cash return is negative. Most first-time landlords don’t model vacancy, maintenance, and property management. Those three line items cut apparent ROI in half before you collect a single check. For more on this topic, see our guide: Cap Rate Explained: What Makes a Good Rental Investment in 2026 (With Real $420K Examples).
The $420,000 Property — Line by Line
Purchase price: $420,000. Down payment at 20%: $84,000 cash out of pocket. Financed amount: $336,000.
At a 7.1% 30-year fixed rate (Freddie Mac PMMS, May 2026), monthly principal and interest runs roughly $2,260. Add property tax ($350/mo at a 1% annual rate) and insurance ($120/mo). That’s $2,730 before a repair.
Monthly rent: $2,800. Gross annual rent: $33,600.
The $70 monthly margin isn’t profit. Not even close.
📊 $420,000 Rental Property — 2026 ROI Snapshot
Annual Monthly Gross rent $33,600 $2,800 Vacancy (5%) –$1,680 –$140 Property management (8%) –$2,688 –$224 Maintenance & repairs (1%) –$4,200 –$350 Property tax –$4,200 –$350 Insurance –$1,440 –$120 Net Operating Income (NOI) $19,392 $1,616 Mortgage P&I –$27,120 –$2,260 Annual cash flow –$7,728 –$644 Estimates · 7.1% rate per Freddie Mac PMMS, May 2026 · 1% tax rate · 5% vacancy · 8% PM fee
Quick math: $420,000 purchase → $19,392 NOI/year — $1,616/month or $746 bi-weekly net operating income before debt service. Estimated · 2026 figures · standard expense ratios.
Negative cash flow. Yes. At $2,800/month rent against a $336,000 mortgage at 7.1%, this property doesn’t cash-flow. That’s the honest answer.
Three ROI Metrics — and What Each One Tells You
There isn’t one ROI number for real estate. There are three. Each measures something different.
Cap Rate strips out financing. It measures the property’s return as if you paid cash.
Cap Rate = NOI ÷ Purchase Price = $19,392 ÷ $420,000 = 4.6%
Cash-on-Cash Return measures what your actual dollars earn — mortgage included.
COC = Annual Cash Flow ÷ Cash Invested = –$7,728 ÷ $84,000 = –9.2%
Negative. But that’s not the whole picture.
In year one, roughly $4,800 of your $27,120 in mortgage payments goes to principal. Your real economic loss shrinks by that amount.
Total Return adds appreciation. At 3% annual appreciation, that’s $12,600 in year one. Add $4,800 equity paydown. Subtract the $7,728 cash shortfall. Net economic gain: $9,672 — or 11.5% on your $84,000.
That’s why investors tolerate negative cash flow in appreciating markets. The math still works. You need reserves to cover the monthly gap.
💡 What each metric tells you
Metric This property What it measures Cap rate 4.6% Property return, ignoring financing Cash-on-cash –9.2% Your actual cash return on down payment Total return (est.) 11.5% Cash flow + equity + appreciation combined 3% annual appreciation assumed · equity from year-1 amortization schedule
How Location Changes the Cap Rate
Cap rates vary sharply by market. The same $420,000 price tag buys very different income streams depending on where you buy.
Most people buying their first rental don’t realize that a $420,000 property in Indianapolis might rent for $3,200/month. Same price in Los Angeles: $2,200. Same capital. Completely different income.
Estimated annual ROI comparison — 6 markets (2026):
- 🟢 Indianapolis, IN — ~6.8% cap rate; rent-to-price ratio typically above 1%; strong cash-flow market
- 🟢 Memphis, TN — ~7.2% cap rate; one of the highest rent-to-price ratios among US metros
- 🟡 Atlanta, GA — ~5.4% cap rate; appreciation potential offsets tighter income ratios
- 🟡 Phoenix, AZ — ~4.9% cap rate; Sun Belt demand supports rent growth but compresses yields
- 🔴 Los Angeles, CA — ~3.1% cap rate; investors betting almost entirely on appreciation
- 🔴 Boston, MA — ~3.4% cap rate; low yields, high entry cost, limited near-term cash flow
Source: National Association of Realtors cap rate surveys + Bureau of Labor Statistics CPI rent data, 2025
What Changes the Math Most
The biggest ROI lever in real estate isn’t the purchase price. It’s the rent-to-price ratio.
Rule of thumb: monthly rent should be at least 0.8%–1% of purchase price to cash-flow at today’s rates. On $420,000, that’s $3,360–$4,200/month. At $2,800, you’re at 0.67%. Under the threshold.
Three adjustments close that gap:
Raise rent to $3,200/month. NOI climbs to $22,992. Cash flow improves to –$4,128/year. Still negative — but manageable with reserves.
Self-manage. Cut the 8% PM fee. That’s $2,688 back annually. Cash flow without PM: –$5,040. Workable if you’re local.
Both. Higher rent plus self-manage adds $5,388/year vs. baseline. You’re at –$2,340/year — nearly breakeven.
💡 Estimated Annual Cash Flow — Scenario Comparison
Scenario Annual cash flow vs. Baseline Baseline ($2,800 rent, managed) –$7,728 — Rent raised to $3,200 –$4,128 +$3,600 Self-managed (no PM fee) –$5,040 +$2,688 $3,200 rent + self-managed –$2,340 +$5,388 $3,500 rent + self-managed +$1,260 +$8,988 Same property · same mortgage · expenses adjusted for rent change · IRS Notice 2024-80
Three Moves That Improve Your Real Estate Returns
Beyond rent and management, tax strategy changes actual dollars.
1. Depreciation deduction. The IRS lets you depreciate residential rental property over 27.5 years. On $420,000 minus land value (~$370,000 depreciable basis), that’s roughly $13,450/year in deductions. That often wipes out taxable rental income entirely. See IRS Publication 527. For more on this topic, see our guide: $50/Month for 10 Years at 5%: The Exact Final Value (And What Changes It).
2. Cost segregation. A cost segregation study breaks the property into shorter-lived components — appliances, flooring, fixtures. You accelerate depreciation into years 1–5. On a $420,000 property, that can pull $30,000–$50,000 in deductions into year one. Works best if you’re a real estate professional for tax purposes.
3. 1031 exchange on exit. When you sell, defer capital gains by rolling proceeds into another investment property. No cap gains tax due at sale. Capital gains tax calculator linked below — run the numbers before you list.
💡 Estimated Annual Cash Flow: Baseline vs. Tax Strategy
Scenario Annual cash flow vs. Baseline Baseline (no moves) –$7,728 — + Depreciation deduction ($13,450) –$7,728 (no cash change) Tax savings ~$3,228 + Cost segregation (yr 1 est.) –$7,728 (no cash change) Tax savings ~$9,600 + Refinance at 6.5% (est. 2027) –$3,960 +$3,768 cash Estimated · tax savings at 24% marginal rate · IRS Rev. Proc. 2025-19
Quick Answers About Rental Property ROI
What’s a good cap rate for a rental property in 2026? Above 5% is solid in most markets at current rates. Above 7% in secondary cities is excellent. Below 4% means you’re betting heavily on appreciation — not income.
Is a 4.6% cap rate worth buying at? In a high-appreciation metro, possibly — investors accept low cap rates when equity growth compensates. In a flat market, a 4.6% cap rate against a 7.1% mortgage means you’re subsidizing the tenant every month. The gap is $644.
How much cash do I need to buy a $420,000 rental? Down payment ($84,000) plus closing costs (2%–5%, or $8,400–$21,000) plus reserves ($10,000–$15,000 minimum). Total out of pocket: $102,000–$120,000.
What’s the 1% rule? Monthly rent should equal at least 1% of purchase price. On $420,000, that’s $4,200/month. Properties clearing the 1% rule typically cash-flow positively at today’s rates. Few coastal markets meet this threshold.
Does rental income get taxed as ordinary income? Yes — at your marginal rate. But depreciation offsets it. The $13,450 annual depreciation on this property often reduces taxable rental income to zero. You pay tax on gains at sale, not on paper depreciation. See IRS Publication 527.
Check Your Exact Scenario
Every deal is different. Plug in your actual rent, purchase price, down payment, and local expenses.