Use this **Long Term Rental Investment Calculator** to determine the profitability of a rental property investment by solving for any of the four key variables: Annual Rental Income, Operating Expenses, Total Investment Cost, or the resulting Capitalization Rate.
Long Term Rental Calculator
Calculated Result:
Detailed Calculation Steps
Long Term Rental Calculator Formula
Net Operating Income (NOI) = ARI – AOE
Capitalization Rate (%) = ($\text{ARI} – \text{AOE}$) / $\text{TIC} \times 100$
Formula Source: Investopedia – Cap Rate | Forbes – Real Estate Metrics
Variables Explained
- Annual Rental Income (ARI): The expected gross rental revenue per year, after accounting for estimated vacancy losses (e.g., Monthly Rent $\times$ 12 $\times$ (1 – Vacancy Rate)).
- Annual Operating Expenses (AOE): The total yearly costs associated with operating the property, including property taxes, insurance, maintenance, repairs, management fees, and utilities (if applicable). This excludes mortgage payments.
- Total Investment Cost (TIC): The total cash required to acquire the property, including the purchase price, closing costs, and any immediate repair or renovation costs needed before renting.
- Capitalization Rate (Cap Rate): A percentage that represents the ratio of the property’s Net Operating Income (NOI) to its Total Investment Cost. It is a key metric for comparing the relative value of different investment properties.
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What is the Long Term Rental Calculator?
The Long Term Rental Calculator uses the fundamental Capitalization Rate (Cap Rate) formula to analyze the potential return on investment for an income property. Unlike simple rent-to-price ratios, the Cap Rate provides a standardized measure of a property’s unleveraged (cash) yield, making it an essential tool for investors comparing opportunities across different markets.
This calculator is designed for flexibility. By allowing you to input three of the four core variables (ARI, AOE, TIC, or Cap Rate), it can solve for the missing fourth. This is highly useful for underwriting: for example, you can input your target Cap Rate and all costs to determine the maximum purchase price (TIC) you should pay.
How to Calculate Cap Rate (Example)
Assume an investment property with an ARI of $\$30,000$, AOE of $\$10,000$, and a TIC of $\$250,000$.
- Calculate Net Operating Income (NOI): Subtract the Annual Operating Expenses (AOE) from the Annual Rental Income (ARI). $$\text{NOI} = \$30,000 – \$10,000 = \$20,000$$
- Divide NOI by Total Investment Cost (TIC): Divide the NOI by the Total Investment Cost to get the Cap Rate as a decimal. $$\text{Cap Rate (Decimal)} = \frac{\$20,000}{\$250,000} = 0.08$$
- Convert to Percentage: Multiply the decimal result by 100 to express the Cap Rate as a percentage. $$\text{Cap Rate (\%)} = 0.08 \times 100 = 8.0\%$$
Frequently Asked Questions (FAQ)
A “good” Cap Rate varies significantly by market, property type, and risk. Generally, core-market, low-risk properties might yield 4-6%, while higher-risk, secondary market properties might yield 8-12% or more. Your target rate should reflect your required return for the risk taken.
Does the Cap Rate include mortgage payments?No. The Cap Rate is calculated based on Net Operating Income (NOI), which is a pre-debt metric. It is used to evaluate the property’s innate earning power regardless of the specific financing structure used by the investor.
How do I estimate the Annual Operating Expenses (AOE)?AOE should include property taxes, property insurance, routine maintenance (typically 5-10% of gross rents), property management fees (8-12% of gross rents), and estimated capital expenditure reserves. It’s crucial to be conservative in these estimates.
What is the difference between Cap Rate and Cash-on-Cash Return?Cap Rate measures the unleveraged return (ignoring the loan). Cash-on-Cash Return measures the leveraged return, specifically comparing the annual pre-tax cash flow (NOI minus Debt Service) against the actual cash invested (down payment and closing costs).