Let's say you buy a three-bedroom single-family home in Chattanooga and rent it out for $1,450 a month. If your mortgage principal and interest payments are around $1,200 each month, you might think you're left with $250. However, it's not accurate to call that $250 pure profit right away. The principal and interest include not only interest but also the principal repayment, which is an asset that increases each month, and it doesn't account for property taxes, insurance, or maintenance costs.

To accurately gauge rental profits, it's essential to distinguish between three key metrics. The first is the total return rate, which is the annual total rental income divided by the purchase price. According to Rent.com, as of July 2026, the average rent in Chattanooga is $1,450 per month, and the median home price over the last three months, according to Redfin, is $356,000. Plugging these numbers in, the total return rate is 4.89%, calculated by dividing the annual rental income of $17,400 by the purchase price. While the number doesn't look bad at first glance, the total return rate has the limitation of not reflecting any costs.

The next metric is the net return rate, commonly referred to as the cap rate. This is the annual net operating income divided by the purchase price, where net operating income is the total income minus operating expenses such as property taxes, insurance, management fees, maintenance costs, and vacancy losses. Mortgage principal and interest do not factor into this. The effective property tax rate in Hamilton County, where Chattanooga is located, is 0.56% according to Ownwell, which is lower than the national median of 1.02%, making it a relatively low-cost area for operating expenses. However, the exact tax rate can vary due to overlapping city and county rates, so it's necessary to verify it based on the property address. Applying the 50% rule, which assumes operating expenses are half of rental income, the net operating income would be $8,700 annually, and the cap rate would drop to 2.44%, significantly lower than the total return rate.

Taking it a step further is the cash-on-cash return rate. This shows how much pre-tax cash flow you have compared to the cash you've put down when purchasing with a loan. Assuming a 20% down payment and 3% closing costs, the actual investment would be $81,880. Using the 30-year fixed mortgage rate of 6.67% from Freddie Mac in August 2026, the principal and interest on a loan of $284,800 would amount to $1,832 monthly, or $21,984 annually. Subtracting this from the net operating income of $8,700 results in an annual cash flow of -$13,284. While the total return rate and cap rate were positive, the cash-on-cash return flips to negative.

The reason for this discrepancy lies in the rental level compared to the purchase price. The price-to-rent ratio, calculated by dividing the $356,000 purchase price by the annual rent of $17,400, is 20.5 times, and typically, if this ratio exceeds 20 times, it's considered that cash flow is likely to be unfavorable when purchasing with a loan. According to the 1% rule, which suggests that if the monthly rent is over 1% of the purchase price, cash flow is likely to be good, this property's rent is only 0.41% of the purchase price, falling significantly short of the benchmark.

Of course, rental profits shouldn't be judged solely on cash flow. Total returns also include capital gains, the increase in assets from the monthly repayment of the loan principal, and tax benefits from depreciation. Chattanooga has relatively low purchase prices within Tennessee, making the initial investment burden lighter, and areas near school districts that Korean families are interested in tend to have properties that are consistently sold. However, school district boundaries change frequently, so it's advisable to check the assigned school for the specific address on sites like GreatSchools or Niche before purchasing.

Before calculating rental profits, here are the items to check:

• Calculate the total return rate using annual rental income and purchase price.
• Recalculate net operating income and cap rate by factoring in property taxes, insurance, management fees, maintenance costs, and vacancy losses.
• Calculate principal and interest based on actual loan conditions to check the cash-on-cash return rate.

Property tax rates and mortgage rates can vary based on timing and loan conditions, so please consider this article's calculations as examples. Before making a final purchase decision, it's safe to verify the latest market prices and tax rates, and consult with real estate and accounting professionals. This article does not constitute investment or legal advice, and it is recommended to consult with professionals before finalizing any contracts.