How to calculate total return on a rental property (cash flow plus loan paydown)

The parts of a rental's return

• Cash flow: rent less operating expenses and loan payments, which is money in your account.
• Principal paydown: the part of the loan payment that reduces what you owe. It is not an expense, and it raises your equity.
• Change in value: the property may be worth more or less. Only a sale or appraisal confirms it.
• Tax effects: depreciation and deductions change what you owe the IRS. They are separate and depend on your return.

Our post on cap rate vs cash-on-cash return explains the first two measures. This one adds the others.

A worked example

Example a made-up rental costs $400,000. You invest $100,000 in cash (down payment and closing costs) and borrow $300,000. In year one, cash flow after all expenses and loan payments is $6,000, and $5,000 of your loan payments went to principal.

Example cash-on-cash return is $6,000 divided by $100,000, which is 6%. Adding the $5,000 of paydown gives $11,000, which is an 11% return on the cash you put in. The $5,000 is not in your bank account. It sits in equity you can reach only by selling or borrowing against the property.

Example if you also choose to count a value rise, say an illustrative 2% of $400,000, which is $8,000, the total is $19,000, or 19%. This is an assumption, not a forecast, and values can fall.

Where principal shows in your books

The interest part of a payment is a rental expense. The principal part is a reduction of the loan, a balance sheet item. A mortgage statement shows the split each month. See recording a mortgage payment. Your tax preparer handles the interest deduction; see IRS Publication 527.

Cautions before you quote a total return

• Say which parts you counted. A 19% figure that includes a guessed value rise is not comparable to a 6% cash figure.
• Paydown is slow at the start of a long loan and faster later, so year one understates the later years.
• A property with negative cash flow can show a positive total return only because of paydown, and you would still be writing checks each month. Check break-even occupancy.
• Do not project a return on a deal from this post; it only shows the arithmetic.

How to compare two rentals fairly

• Use the same year for both properties.
• Count the same parts for both: cash flow, paydown, and whether you count value change.
• Use cash actually invested, including closing costs and repairs you paid.
• Ignore taxes in the first pass, then ask your preparer how each property is taxed.

A rental bought with a smaller down payment can show a high cash-on-cash return because the cash invested is small, while carrying more debt and more risk. A rental bought with more cash may show a lower return and sleep easier. Neither number is a verdict; they describe different uses of your money. Pair the return with the DSCR and the break-even occupancy so you also see how much room the property has before it loses money. Update the figures yearly with the actual numbers from your books instead of the figures you estimated when you bought.

How DoorKeeping fits

DoorKeeping keeps the mortgage balance, interest and principal in the property's books, with cash flow from the bank feed. You can ask Claude or ChatGPT for last year's cash flow and the loan paydown for a property. It does not forecast returns. It costs $2 per unit per month.

Sources

1. IRS, Publication 527, Residential Rental Property, read Oct 31, 2026
2. CFPB, What is a loan-to-value ratio?, read Oct 31, 2026

Questions

Is principal paydown part of my return?

It raises your equity, so many owners count it, but it is not cash in hand. State which version you are quoting.

Is loan principal a deductible expense?

No. Interest is a rental expense; principal repays the loan. Your tax preparer handles the details.

Should I count appreciation?

Only if you label it as an assumption. It may not happen, and it is realized only on a sale.