Calculating the rate of return on a rental property is a crucial step for any real estate investor. It helps you understand the profitability of your investment relative to the capital you've put in. A higher rate of return generally indicates a more profitable investment. This calculation typically considers the net operating income generated by the property and the total cash invested.
There are several ways to calculate rate of return, but a common and straightforward method is the Capitalization Rate (Cap Rate) and the Cash-on-Cash Return. The Cap Rate measures the unleveraged return, while the Cash-on-Cash Return measures the return on your actual cash invested, factoring in financing.
This calculator will help you determine the Cash-on-Cash Return, which is often more relevant for investors who are using leverage (mortgages) to acquire properties.
Cash-on-Cash Return Calculation Explained
The formula for Cash-on-Cash Return is:
Cash-on-Cash Return = (Annual Net Operating Income / Total Cash Invested) * 100
Annual Net Operating Income (NOI): This is the annual income generated by the property after deducting all operating expenses. Operating expenses include property taxes, insurance, property management fees, repairs, maintenance, and vacancy costs, but exclude mortgage principal and interest payments.
Total Cash Invested: This is the total amount of cash you have put into the property to acquire and get it ready for rental. This typically includes the down payment, closing costs, and any initial renovation or repair expenses.
Understanding these components is vital for accurately assessing your investment's performance.
Rental Property Rate of Return Calculator
function calculateRateOfReturn() {
var annualRentalIncome = parseFloat(document.getElementById("annualRentalIncome").value);
var annualOperatingExpenses = parseFloat(document.getElementById("annualOperatingExpenses").value);
var downPayment = parseFloat(document.getElementById("downPayment").value);
var closingCosts = parseFloat(document.getElementById("closingCosts").value);
var initialRepairs = parseFloat(document.getElementById("initialRepairs").value);
var resultDiv = document.getElementById("result");
if (isNaN(annualRentalIncome) || isNaN(annualOperatingExpenses) || isNaN(downPayment) || isNaN(closingCosts) || isNaN(initialRepairs)) {
resultDiv.innerHTML = "Please enter valid numbers for all fields.";
return;
}
if (annualRentalIncome < 0 || annualOperatingExpenses < 0 || downPayment < 0 || closingCosts < 0 || initialRepairs < 0) {
resultDiv.innerHTML = "Please enter non-negative values.";
return;
}
var annualNetOperatingIncome = annualRentalIncome – annualOperatingExpenses;
var totalCashInvested = downPayment + closingCosts + initialRepairs;
if (totalCashInvested <= 0) {
resultDiv.innerHTML = "Total cash invested must be greater than zero.";
return;
}
var cashOnCashReturn = (annualNetOperatingIncome / totalCashInvested) * 100;
resultDiv.innerHTML = "