Rental Property ROI Calculator
Investment Analysis
Understanding Rental Property ROI Analysis
Investing in real estate is one of the most reliable ways to build wealth, but not every property is a good deal. To ensure profitability, investors rely on specific metrics like Cash on Cash Return, Cap Rate, and Net Operating Income (NOI). This Rental Property ROI Calculator helps you analyze a potential investment property by breaking down the expenses, mortgage obligations, and projected rental income.
Key Real Estate Metrics Explained
1. Net Operating Income (NOI)
NOI is a fundamental calculation used to analyze the profitability of income-generating real estate investments. It represents the total income the property generates after all operating expenses (taxes, insurance, maintenance, vacancy) are deducted, but before mortgage payments. A positive NOI indicates the property can cover its operating costs.
2. Cap Rate (Capitalization Rate)
The Cap Rate measures the natural rate of return on an investment assuming it was purchased entirely in cash. It is calculated by dividing the NOI by the purchase price.
Formula: Cap Rate = NOI / Purchase Price.
A higher Cap Rate generally indicates a better annual return, though it may also come with higher risk.
3. Cash on Cash Return (CoC)
For most investors who use financing (mortgages), the Cash on Cash Return is the most critical metric. It measures the annual cash income earned on the cash actually invested (down payment plus closing costs).
Formula: CoC = Annual Cash Flow / Total Cash Invested.
Many investors aim for a CoC return between 8% and 12%.
How to Use This Calculator
To get the most accurate results from the Rental Property ROI Calculator, ensure you input realistic figures:
- Vacancy Rate: No property is occupied 100% of the time. A standard conservative estimate is 5% to 8%.
- Maintenance: Allocating 5% to 10% of monthly rent for repairs ensures you aren't caught off guard by broken water heaters or roof leaks.
- Closing Costs: Don't forget the fees associated with buying the property, such as title insurance, appraisal fees, and loan origination charges.
Example Scenario
Imagine purchasing a property for $250,000 with 20% down. If the property rents for $2,200/month and your total operating expenses (taxes, insurance, HOA) are kept reasonable, you might see a Cash on Cash return of over 7%. However, if the rent drops to $1,800, that return could plummet. Use the calculator above to stress-test your numbers before making an offer.