Rental Property ROI Calculator
Investment Analysis
How to Analyze a Rental Property Investment
Investing in real estate is a powerful way to build wealth, but accurate analysis is crucial before signing any contract. This Rental Property ROI Calculator helps investors evaluate the profitability of a potential purchase by breaking down the numbers that matter most: Cash Flow, Cash on Cash Return, and Cap Rate.
Understanding Key Metrics
1. Cash on Cash Return (CoC)
This is arguably the most important metric for rental investors. It measures the annual return you make on the actual cash you invested (Down Payment + Closing Costs), rather than the total price of the home. A CoC return of 8-12% is often considered a solid benchmark for residential rentals.
Formula: (Annual Cash Flow / Total Cash Invested) × 100
2. Cap Rate (Capitalization Rate)
Cap Rate measures the natural rate of return of the property assuming you bought it in all cash. It helps compare properties without the influence of mortgage financing. Higher cap rates generally imply higher risk or higher potential return.
Formula: (Net Operating Income / Purchase Price) × 100
3. Net Operating Income (NOI)
NOI calculates the profitability of the property after all operating expenses (Taxes, Insurance, HOA, Maintenance) are paid, but before the mortgage is paid. It is the raw earnings power of the asset.
How to Estimate Expenses
When using this calculator, ensure you are realistic with expense inputs:
- Vacancy Rate: While not a direct input above, consider reducing your monthly rent input by 5-8% to account for months when the unit is empty.
- Maintenance: A common rule of thumb is to budget 1% of the property value annually, or 5-10% of the rent, for repairs and maintenance.
- Property Management: If you hire a manager, deduct another 8-10% from your monthly rental income.
Why Cash Flow Matters
Positive cash flow ensures that the property pays for itself and puts money in your pocket every month. Negative cash flow means you are subsidizing the tenant's housing. While some investors bank on appreciation (the home value going up), a strategy focused on positive cash flow is generally safer and more sustainable for long-term growth.