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How to Analyze a Rental Property Investment
Investing in real estate is a powerful way to build wealth, but simply buying a property and renting it out doesn't guarantee a profit. Successful investors rely on specific financial metrics to evaluate whether a property is a "good deal." This Rental Property Calculator helps you break down the numbers that matter most.
Key Metrics Explained
1. Cash Flow
Cash flow is the profit you bring in each month after all operating expenses and mortgage payments have been paid. It is calculated as:
Cash Flow = Total Rental Income – (Operating Expenses + Debt Service)
Positive cash flow is essential for long-term sustainability. It acts as a safety net against vacancies and repairs while providing passive income.
2. Cash-on-Cash Return (CoC)
This metric measures the annual return on the actual cash you invested, rather than the total purchase price. It gives you a clear picture of how hard your money is working for you.
CoC Return = (Annual Pre-Tax Cash Flow / Total Cash Invested) × 100%
Total cash invested includes your down payment, closing costs, and initial repair costs. A CoC return of 8-12% is often considered a solid benchmark for rental properties, though this varies by market.
3. Cap Rate (Capitalization Rate)
The Cap Rate measures the natural rate of return of the property assuming you bought it with all cash (no loan). It allows you to compare properties regardless of financing.
Cap Rate = (Net Operating Income / Purchase Price) × 100%
Net Operating Income (NOI) is your annual income minus operating expenses (excluding mortgage payments). A higher Cap Rate generally implies a better return but may come with higher risk.
Operating Expenses to Consider
Many new investors underestimate expenses. When calculating ROI, ensure you account for:
- Vacancy: Properties won't be rented 365 days a year. Budgeting 5-8% helps cover turnover periods.
- Maintenance & CapEx: Roofs leak and water heaters break. Setting aside 5-10% of rent ensures you have funds for repairs.
- Management Fees: Even if you self-manage, it's wise to account for your time or future management costs (typically 8-10%).
function calculateROI() {
// Get Inputs
var price = parseFloat(document.getElementById('purchasePrice').value) || 0;
var downPercent = parseFloat(document.getElementById('downPayment').value) || 0;
var interestRate = parseFloat(document.getElementById('interestRate').value) || 0;
var termYears = parseFloat(document.getElementById('loanTerm').value) || 0;
var closingCosts = parseFloat(document.getElementById('closingCosts').value) || 0;
var repairCosts = parseFloat(document.getElementById('repairCosts').value) || 0;
var monthlyRent = parseFloat(document.getElementById('monthlyRent').value) || 0;
var taxYear = parseFloat(document.getElementById('propertyTax').value) || 0;
var insuranceYear = parseFloat(document.getElementById('insurance').value) || 0;
var hoaMonth = parseFloat(document.getElementById('hoa').value) || 0;
var vacancyPercent = parseFloat(document.getElementById('vacancyRate').value) || 0;
var maintPercent = parseFloat(document.getElementById('maintenance').value) || 0;
// Calculations
// 1. Mortgage
var downPaymentAmount = price * (downPercent / 100);
var loanAmount = price – downPaymentAmount;
var monthlyRate = (interestRate / 100) / 12;
var numberOfPayments = termYears * 12;
var mortgagePayment = 0;
if (interestRate > 0) {
mortgagePayment = loanAmount * (monthlyRate * Math.pow(1 + monthlyRate, numberOfPayments)) / (Math.pow(1 + monthlyRate, numberOfPayments) – 1);
} else {
mortgagePayment = loanAmount / numberOfPayments;
}
// 2. Monthly Expenses
var vacancyCost = monthlyRent * (vacancyPercent / 100);
var maintenanceCost = monthlyRent * (maintPercent / 100);
var monthlyTax = taxYear / 12;
var monthlyInsurance = insuranceYear / 12;
var operatingExpenses = monthlyTax + monthlyInsurance + hoaMonth + vacancyCost + maintenanceCost;
var totalMonthlyExpenses = operatingExpenses + mortgagePayment;
// 3. Cash Flow
var monthlyCashFlow = monthlyRent – totalMonthlyExpenses;
var annualCashFlow = monthlyCashFlow * 12;
// 4. NOI (Net Operating Income)
// NOI = Income – Operating Expenses (Excluding Debt Service)
var annualOperatingExpenses = operatingExpenses * 12;
var annualNOI = (monthlyRent * 12) – annualOperatingExpenses;
// 5. Cap Rate
// Cap Rate = NOI / Price
var capRate = (annualNOI / price) * 100;
// 6. Cash on Cash Return
// CoC = Annual Cash Flow / Total Cash Invested
var totalCashInvested = downPaymentAmount + closingCosts + repairCosts;
var cashOnCash = (annualCashFlow / totalCashInvested) * 100;
// Formatting Output
var formatter = new Intl.NumberFormat('en-US', {
style: 'currency',
currency: 'USD',
});
document.getElementById('resCashNeeded').innerHTML = formatter.format(totalCashInvested);
document.getElementById('resMortgage').innerHTML = formatter.format(mortgagePayment);
document.getElementById('resExpenses').innerHTML = formatter.format(totalMonthlyExpenses);
document.getElementById('resCashFlow').innerHTML = formatter.format(monthlyCashFlow);
document.getElementById('resNOI').innerHTML = formatter.format(annualNOI);
document.getElementById('resCapRate').innerHTML = capRate.toFixed(2) + '%';
document.getElementById('resCoC').innerHTML = cashOnCash.toFixed(2) + '%';
// Styling adjustments for negative flow
var cashFlowElem = document.getElementById('resCashFlow');
if(monthlyCashFlow < 0) {
cashFlowElem.style.color = '#e74c3c';
} else {
cashFlowElem.style.color = '#27ae60';
}
// Show Results
document.getElementById('results-area').style.display = 'block';
}