The relevant investment is the deposit plus purchase tax and every other upfront cost you fund. The relevant return is what remains after realistic property costs, financing and tax—not gross rent.
Test 1: operating economics
Calculate collected rent after vacancy, then deduct the costs required to run the property before financing. This produces net operating income. It shows whether the property itself has healthy economics, independently of the mortgage structure.
Management fees, service charges, insurance, routine repairs, compliance and periodic expenditure should not be treated as optional simply because they do not happen every month.
Test 2: cash affordability
Deduct mortgage payments and estimated tax from operating income. This is the annual cash flow available to the owner. For a repayment mortgage, part of the payment reduces principal and therefore builds equity, but it still consumes cash each month.
Check the result in year one, after the next mortgage refix and in a year containing a major repair. Averages can hide individual years in which you must contribute money.
Test 3: return on your money
Divide annual cash flow by the total initial cash invested to calculate cash-on-cash return. Then use IRR to incorporate later cash flows, mortgage repayment and the eventual sale. A positive IRR does not guarantee positive annual cash flow because capital growth and mortgage principal repayment can create value while the property consumes cash during ownership.
Test 4: downside resilience
Reduce occupancy, increase the mortgage rate and lower the exit price. Ask whether you could still afford the property and whether its return remains worthwhile. A deal that only works under the central assumptions has little protection against normal uncertainty.
When might the answer be “no”?
- Cash flow is negative before allowing for unusual repairs.
- The return depends mainly on a high future sale price.
- A refinancing increase would make the property unaffordable.
- The total return is weak relative to more liquid, diversified alternatives.
- You would use nearly all available savings for the purchase.
The conclusion is not purely mathematical. Property requires administration, carries legal obligations and is expensive to sell. Those disadvantages need to be compensated by the expected financial outcome or by other objectives that matter to you.
Run all four tests