There is a case where an investor, with a mortgage payment of $3,200, calculated that they were making $100 a month after receiving $3,300 in rent. They considered that $100 as net cash flow, but in reality, it did not account for property taxes, insurance, or management fees.

Let's start with the rental prices in LA. According to RentCafe data, as of August 2026, the average rent for all apartments in LA is $2,755, and for a 2-bedroom, it is around $3,361. The average home value in LA, according to Zillow, is $949,479, which has decreased by 0.7 percent over the past year. For this example, let's assume a purchase price of $950,000 and a 2-bedroom rental at $3,361.

The annual rental income is $40,332, and the total return rate calculated by dividing this by the purchase price is 4.25 percent. This is the number that is typically included in most property descriptions. However, it is easy to overlook that mortgage principal and interest do not factor into the total return rate or cap rate calculations. The cap rate only reflects operating expenses such as property taxes, insurance, HOA fees, maintenance costs, and vacancy losses, while loan repayments are considered separately.

Using the 50 percent rule to estimate operating expenses, the net operating income is about $20,166, and the cap rate drops to 2.12 percent. The effective property tax rate in Los Angeles County is about 0.69 percent, and when insurance and management fees are added, it is common for the net operating income to fall below half of the total income.

What the investor overlooked was the net cash flow that reflects both the mortgage repayment and operating expenses. Net cash flow is the value obtained by subtracting the mortgage principal and interest from the net operating income, and the cash-on-cash return is calculated by dividing this net cash flow by the actual cash invested, which is the sum of the down payment and closing costs. Even if the cap rate is in the 2 percent range, the cash-on-cash return can be higher or lower depending on the loan interest rate and terms.

• Total Return = Annual Rental Income / Purchase Price
• Cap Rate = Net Operating Income (NOI) / Purchase Price
• Cash-on-Cash = Annual Pre-Tax Cash Flow / Actual Cash Invested

These three metrics answer different questions. The total return gives a rough estimate of scale, the cap rate is used to compare profitability by region or asset type, and the cash-on-cash return shows the actual perceived return when a loan is involved. Judging a property based on just one of these metrics can lead to misconceptions about the actual money left over, as seen in this case.

Additionally, the perspective of total returns should not be overlooked. Even if the monthly net cash flow is not large, when combined with the asset accumulation from loan principal repayment, long-term capital gains, and tax benefits from depreciation, the picture changes. In high purchase price markets like LA, many investors approach with a focus on these long-term total returns rather than immediate cash flow. However, the tax benefits from depreciation can vary based on individual income levels and tax situations, making it difficult to generalize.

Taxes and loan conditions can vary by county and lending institution, so it is advisable to review the numbers again with real estate and loan professionals before making an actual purchase.

If you are accustomed to the rental calculation in Korea, the concept of cap rate may be unfamiliar. In Korea, it was common to compare the jeonse deposit with the sale price, while in the U.S., profitability is assessed based on the net operating income after deducting operating expenses from monthly rental income. Vacancy losses must also be factored in, and if you account for the one or two months of vacancy when tenants change, the annual net operating income may be slightly lower.

By developing the habit of calculating total return, cap rate, and cash-on-cash return in order each time you review a property, you can reduce the chances of confusing mortgage repayments with net cash flow, as this investor did. Once you understand why these three numbers differ, comparing properties becomes much clearer. This article is not investment or legal advice.