Rental Property ROI Calculator
Investment Summary
How to Calculate Rental Property ROI
Investing in real estate requires a clear understanding of profitability metrics. This calculator helps you determine the viability of a rental property by looking at two primary factors: Cap Rate and Cash-on-Cash Return.
1. Capitalization Rate (Cap Rate)
The Cap Rate measures the property's natural rate of return without considering financing. It is calculated by taking the Net Operating Income (NOI) and dividing it by the purchase price. A "good" cap rate typically falls between 4% and 10%, depending on the market location.
2. Cash-on-Cash Return
This is arguably the most important metric for investors using leverage (mortgages). It measures the annual cash flow relative to the actual "out-of-pocket" cash invested (down payment and closing costs). If you put down $50,000 and earn $5,000 in annual profit, your cash-on-cash return is 10%.
Example Scenario
- Purchase Price: $200,000
- Down Payment: $40,000 (20%)
- Monthly Rent: $1,800
- Expenses: $500 (Taxes, Insurance, Vacancy)
- Mortgage: $1,011 (at 6.5% interest)
In this example, your monthly cash flow would be $289 ($1,800 rent – $500 expenses – $1,011 mortgage). Your annual return on the $40,000 investment would be approximately 8.67%.