We will follow the story of a Korean family who was reviewing rental properties for the first time. They were considering a three-bedroom single-family home in the eastern part of Phoenix and were wondering if the rental income would be decent. Instead of rushing to sign a contract based solely on the listing price, they decided to first calculate how much the house could actually earn.

According to Zillow, as of June 30, 2026, the average home value in Phoenix is around $410,222. At the same time, data from Zillow Rental Manager shows that the average rent for all property types in Phoenix is $1,939 per month. With just these two numbers, we can calculate the simplest indicator, the total yield. Dividing the annual rental income of $23,268 by the purchase price gives a total yield of about 5.67%.

This is where the family's initial concern arises. They wondered if 5.67% was a good return. However, the total yield does not account for operating costs such as taxes, insurance, and management fees, so it may not reflect the actual money left in hand. Therefore, they moved on to the next step to examine the net yield, or cap rate.

The cap rate is the annual net operating income divided by the purchase price. The net operating income is the total rental income minus operating expenses such as property taxes, insurance, maintenance costs, and vacancy losses, and it does not include mortgage principal and interest. The average effective property tax rate in Arizona is about 0.51%, which is significantly lower than the national average. However, Maricopa County, where Phoenix is located, is known to be slightly higher at around 0.56%, so it's important to keep in mind that there can be differences by county.

If we use the 50% rule to estimate operating costs at about half of the rental income, the net operating income for this property would be around $11,600 annually, and the cap rate drops to about 2.8%. The gap between the total yield and the cap rate reflects the difference before and after accounting for costs, which is an aspect that can be easily overlooked if one only considers the total yield when selecting a property.

If financing was used, it's time to check the cash-on-cash return as well. This metric calculates the pre-tax cash flow relative to the actual cash invested, including down payment and closing costs. Even with the same net operating income, the perceived return can vary significantly depending on the loan-to-value ratio. Using leverage can result in a cash-on-cash return that is higher than the cap rate, or conversely, if the interest burden is high, it can be lower.

Recently, the rental market in Phoenix has shown signs of cooling, with RentCafe reporting a 2.27% decrease compared to last year. During periods when rents are not rising, it may be safer to conservatively estimate vacancy losses. Initially, the family did not consider vacancies much, but after recalculating, they adjusted the yield conservatively by factoring in one month of vacancy loss.

In neighborhoods with highly rated school districts preferred by Korean families, the purchase prices tend to be higher, resulting in lower total yields. This is often because the school district premium returns more in long-term capital appreciation and stable housing demand rather than rental income. While school district ratings can be referenced from metrics like GreatSchools, it's important to verify the assigned school for the specific address before making a purchase, as boundaries can change frequently.

• Total Yield = Annual Rental Income / Purchase Price x 100
• Cap Rate = Annual Net Operating Income / Purchase Price x 100
• Cash-on-Cash Return = Annual Pre-Tax Cash Flow / Actual Cash Invested x 100

Ultimately, calculating rental income is not just about one number; it's a process of examining the property through three lenses: total yield, cap rate, and cash-on-cash return. Additionally, to get the full picture of total returns, one must also consider capital appreciation and asset growth from mortgage principal repayment. This article is not investment or legal advice, and it is recommended to review the specific conditions of individual properties with an accountant or real estate professional before making any contracts.