Rental Property Calculator
Evaluate real estate investment properties, calculating cash flow, cap rate, and cash-on-cash return.
The Mathematical Formula
Variable & Parameter Definitions
- Effective Gross Income Gross potential rental income minus vacancy allowance (e.g. 5% to 8%) plus auxiliary income (parking, laundry).
- Operating Expenses Property management (8%–10%), property taxes, insurance, repairs, maintenance reserves, and HOA fees (excluding mortgage debt service).
- NOI Net Operating Income generated by the real estate asset before mortgage payments and income taxes.
- Cap Rate (%) Unleveraged annual rate of return on the property purchase price.
- Cash-on-Cash Return (%) Leveraged annual cash yield on actual out-of-pocket cash invested (down payment + closing costs + rehab).
Real-World Worked Scenario: $300,000 Single-Family Rental with 25% Down Payment
An investor buys a $300,000 rental property ($75,000 down + $6,000 closing = $81,000 cash invested) generating $2,400/month rent with $800/mo operating expenses and $1,350/mo mortgage.
- Annual Effective Gross Income (5% Vacancy): ($2,400 × 12) × 0.95 = $27,360.
- Annual Operating Expenses: $800 × 12 = $9,600.
- Net Operating Income (NOI): $27,360 - $9,600 = $17,760.
- Capitalization Rate (Cap Rate): ($17,760 ÷ $300,000) × 100% = 5.92%.
- Annual Debt Service: $1,350 × 12 = $16,200.
- Pre-Tax Cash Flow: $17,760 (NOI) - $16,200 (Mortgage) = $1,560 per year ($130/month).
- Cash-on-Cash Return: ($1,560 ÷ $81,000 cash invested) × 100% = 1.93% cash yield (plus loan principal paydown and tax depreciation benefits).
Strategic Insights & Pitfalls to Avoid
- ✓ The 1% Rule of Thumb: A quick screening metric: monthly gross rent should equal roughly 0.8% to 1.0% of the total purchase price to generate positive cash flow.
- ✓ Depreciation Tax Shield: Residential rental structures are depreciated over 27.5 years, shielding a large portion of cash flow from current income taxes.
- ✓ Capital Expenditure (CapEx) Reserves: Always reserve $150 to $250 per month for major capital replacements (roofs, furnaces, water heaters).
Frequently Asked Questions
What is the difference between Cap Rate and Cash-on-Cash return?
Cap Rate evaluates property profitability assuming a 100% all-cash purchase. Cash-on-Cash return measures actual return on your specific leveraged cash investment after mortgage debt service.
Why is mortgage principal and interest excluded from NOI?
NOI evaluates the fundamental operational earning power of the real estate itself, independent of whether an owner uses high leverage or all cash.
How does depreciation reduce rental property taxes?
The IRS allows you to deduct the building value (excluding land) divided by 27.5 years each year as a paper expense against rental income.