Last month, an investor who requested a consultation was considering a two-bedroom condo in Long Beach and was about to make a purchase decision based solely on the total return percentage mentioned in the property description. I spent most of the consultation time explaining that the percentage derived from dividing the purchase price by the monthly rent does not reflect the actual profit left over.

Let's first take a look at the rental market in Long Beach. According to RentCafe data, as of July 2026, the average rent for apartments in Long Beach is $2,709, while for two-bedroom units, it is around $3,112. The sale price, according to Zillow, was $788,693 at the end of June 2026, which has decreased by about 1.3 percent over the past year. To simplify the calculation, let's consider a condo with a purchase price of $780,000 and a monthly rent of $3,100.

The total return is calculated by dividing the annual rental income by the purchase price. Dividing the annual rental income of $37,200 by $780,000 gives approximately 4.77 percent. Most investors can calculate this part themselves. The problem is that this number does not account for operating costs such as property taxes, insurance, management fees, maintenance costs, and vacancy losses.

The cap rate, or net yield, is the net operating income divided by the purchase price. If you haven't accurately estimated the operating costs yet, you can refer to the commonly used 50 percent rule in the industry. Assuming that about half of the rental income goes to operating costs excluding mortgage principal and interest, the net operating income would be about $18,600. Dividing this by $780,000 results in a cap rate of about 2.38 percent. The effective property tax rate in Los Angeles County, where Long Beach is located, is known to be around 0.69 percent, which accounts for a significant portion of the operating costs.

If you are using financing, you should also consider the cash-on-cash return. Investment properties typically require a down payment of 20 to 25 percent, but the actual cash invested is not the total purchase price but the sum of the down payment and closing costs. Even with the same cash flow, using leverage can yield different numbers than the cap rate, which can be higher or lower depending on the interest rate level.

Applying the 1 percent rule, the monthly rent should be at least 1 percent of the purchase price, or $7,800, to meet the guideline for stable cash flow, but in this example, it falls short of that by half. However, in areas like Long Beach where there is an expectation of capital appreciation, many investors consider total returns that include not just immediate cash flow but also loan principal repayment and asset value increase.

If we stop here, we would be making investment decisions based solely on the cap rate. Total returns must also consider capital appreciation, asset increase due to loan principal repayment, and tax benefits from depreciation. If the property was purchased with a fixed-rate loan, part of the monthly principal and interest payment is not just an expense but contributes to the asset as principal repayment. This portion may not show up in the monthly cash flow statement, but after a few years, checking the loan balance will reveal that it has actually increased net worth.

Breaking down operating costs further, maintenance costs typically run around 1 percent of the asset value, and if management is outsourced, an additional 8 to 12 percent of the rent will be incurred. If we include management fees in the previous example, the net operating income could be lower than the estimated value using the 50 percent rule. Conversely, if managed directly, while it requires more time and effort, the cap rate may increase slightly. I provided the investor with both scenarios in numerical form, explaining that the final choice would depend on their available time and cash flow priorities.

Property taxes and insurance can vary by county and insurance company, so when reviewing actual properties, please check the tax bill and insurance quotes for the specific address. This article is not investment or legal advice, and it is recommended to consult with real estate and tax professionals before making any actual contracts.