Fixed-Rate Mortgage

On a fixed-rate mortgage the rate never changes, so the principal and interest payment is identical from the first month to the last. For a rental that makes debt service the one expense line that never rises, so cash on cash return tends to improve as rents increase.

The default loan is a 30-year fixed at 7.25%: $2,558 a month for 360 months. If rent grows while the payment holds still, every dollar of rent increase that is not eaten by rising taxes or insurance adds to cash flow and to the return on the same $150,000.

The trade is that fixed rates usually start higher than adjustable ones, and the rate stays put when market rates fall unless you pay to refinance. Investors who plan to hold for many years usually value the certainty more than the lower starting payment of an ARM.

Further reading: Fixed-Rate Mortgage on Wikipedia.