$350K Rental Property: −$7K Year 1 Cash Flow, 8.2% Year-10 IRR
The Numbers Jake Ran Before Buying
Jake is 34, has $110,000 saved, and keeps hearing that rental properties are the path to passive income. He finds a $350,000 single-family home in a suburb where similar places rent for $2,100/month. He pulls out a spreadsheet.
What he found wasn’t what the real estate podcasts promised.
Setting Up the Investment
Jake puts 25% down — $87,500. Add closing costs of ~$5,250 (1.5%), and his total cash invested is $92,750.
The mortgage: $262,500 financed at 6.5% for 30 years = $1,659/month in principal and interest.
Year 1: The Cold Shower
Year 1 P&L laid out line by line:
| Line | Annual amount |
|---|---|
| Gross rent ($2,100 × 12) | +$25,200 |
| Vacancy reserve (8%) | −$2,016 |
| Effective rental income | +$23,184 |
| Property management (8%) | −$1,855 |
| Property tax (1.1% of value) | −$3,850 |
| Insurance | −$1,200 |
| Repairs and maintenance | −$3,500 |
| Total operating expenses | −$10,405 |
| Net Operating Income (NOI) | $12,779 |
| Mortgage P&I ($1,659 × 12) | −$19,908 |
| Year 1 pre-tax cash flow | −$7,129 |
Jake is cash-flow negative by $7,129 in Year 1 — $594/month out of pocket.
But Wait — What About the Cap Rate?
The cap rate (NOI ÷ purchase price) is a measure of the property’s return independent of financing:
$12,779 ÷ $350,000 = 3.65%
For context, a 10-year Treasury bond currently yields around 4.3%. On an unleveraged basis, this property barely clears zero in real terms after inflation.
The cash-on-cash return (Year 1 cash flow ÷ cash invested) is: −$7,129 ÷ $92,750 = −7.7%
Year 1 is a loss. Year 2 and 3 look similar. This is where most first-time investors panic and sell.
The 10-Year View: Where It Gets Interesting
Jake stays patient. Assumptions: 3% annual rent growth, 3% appreciation, expenses inflate with rent. The full year-by-year picture:
| Year | Monthly cash flow | Property value | Equity | Cumulative cash flow |
|---|---|---|---|---|
| 1 | −$594 | $350,000 | $95,000 | −$7,100 |
| 3 | −$340 | $371,000 | $108,000 | −$18,000 |
| 5 | +$210 | $406,000 | $138,000 | −$15,500 |
| 7 | +$420 | $443,000 | $172,000 | −$5,000 |
| 10 | +$610 | $470,000 | $252,000 | +$13,200 |
By Year 5 cash flow turns positive — roughly +$200/month. By Year 10, monthly cash flow is around +$600 and the equity has grown from $92,750 to roughly $252,000 (property value minus remaining loan balance).
10-year IRR: approximately 8.2% — comparable to a balanced stock/bond portfolio, but required $92,750 upfront, 10 years of patience, occasional 2am maintenance calls, and 4 years of negative cash flow.
The Metric That Actually Matters
Year 1 cash flow is almost always negative for leveraged rental properties purchased in today’s market. That’s not a sign the deal is bad — it’s the structure of leveraged real estate.
The metric that actually tells you whether a deal works is IRR over your expected hold period. A property with a −7.7% cash-on-cash return in Year 1 can still deliver 8–10% IRR over 10 years once you include principal paydown and appreciation.
But if the IRR pencils out at 4–5%, you’re locking up $90k in illiquid capital for a return you could match by sitting in a money market fund — without the tenant calls.
Where this scenario doesn’t apply
- Cash buyers. No mortgage means no financing drag. The cap rate and cash-on-cash converge. Different (much shorter) break-even structure.
- High-appreciation markets. If you have strong reason to believe your specific market will outpace 3% appreciation (Sunbelt growth, gentrifying area), the IRR shifts dramatically. The “if” carries the analysis.
- House hacking. Living in part of the property dramatically changes the math. Rent from other units offsets your housing costs; tax treatment changes. Different framework.
- Below 1% rent-to-price. A property where monthly rent is below 0.5% of purchase price almost never makes financial sense, even at long horizons. Don’t run the calculator if the screening filter already failed.
Open the Rental Property ROI Calculator → and run your specific deal. The 10-year IRR is the metric to evaluate against; year-1 cash flow alone misleads.