Real Estate Rate of Return Calculator
Understanding Your Real Estate Returns
Calculating the rate of return in real estate is distinctly different from standard investment portfolios or loan amortization schedules. Unlike a simple savings account with a fixed interest rate, real estate investments rely on multiple performance metrics to determine profitability. This calculator focuses on the two most critical indicators for rental property investors: Cap Rate and Cash on Cash Return.
1. Net Operating Income (NOI)
NOI is the foundation of real estate valuation. It represents the total income generated by the property minus all necessary operating expenses. Crucially, NOI excludes debt service (mortgage payments) and income taxes. It is a pure measure of the property's ability to generate revenue.
Formula: Gross Rental Income – Operating Expenses = NOI
2. Capitalization Rate (Cap Rate)
The Cap Rate measures the natural rate of return of the property as if it were purchased entirely with cash. It allows you to compare the profitability of different properties regardless of how they are financed. A higher cap rate generally indicates higher returns but may come with higher risk.
Formula: (NOI / Purchase Price) × 100
3. Cash on Cash Return (CoC)
Cash on Cash Return is often the most important metric for investors using leverage (loans). It measures the annual cash flow relative to the actual cash you invested (down payment, closing costs, and repairs), rather than the total property price. This reveals the efficiency of your capital.
Formula: (Annual Cash Flow / Total Cash Invested) × 100
What is a Good Rate of Return?
While "good" is subjective, many investors target a Cash on Cash Return of 8-12% for buy-and-hold residential properties. Cap rates vary significantly by market; premium markets ("A-Class" neighborhoods) may see Cap Rates of 3-5%, while riskier markets might offer 8-10%.