Rental Property ROI Calculator
Calculate Cash Flow, Cap Rate, and Cash on Cash Return
Understanding Rental Property ROI
Investing in real estate is a powerful way to build wealth, but simply buying a property doesn't guarantee a profit. To succeed, investors must analyze the numbers rigorously. This Rental Property ROI Calculator helps you evaluate the profitability of a potential investment by breaking down income, expenses, and financing costs to reveal key performance metrics.
Key Metrics Explained
1. Cash Flow
Cash flow is the net amount of money moving in or out of the investment after all expenses and debt service (mortgage payments) are paid.
Formula: Rental Income – (Operating Expenses + Mortgage Payment).
Positive cash flow means the property pays for itself and generates profit. Negative cash flow implies you must contribute money monthly to keep the property.
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 is crucial for understanding the efficiency of your deployed capital.
Formula: (Annual Cash Flow / Total Cash Invested) × 100.
Total cash invested usually includes the down payment, closing costs, and initial repair costs.
3. Cap Rate (Capitalization Rate)
The Cap Rate measures the property's natural rate of return assuming it was bought with all cash (no loan). It allows you to compare properties regardless of financing.
Formula: (Net Operating Income / Purchase Price) × 100.
A higher Cap Rate generally indicates a higher return potential but may come with higher risk.
4. Net Operating Income (NOI)
NOI is the total income generated by the property minus all necessary operating expenses (taxes, insurance, maintenance, vacancy, HOA), but excluding mortgage payments and income taxes. Lenders look at this number to determine if the property generates enough income to cover the loan.
How to Use This Calculator
- Purchase Info: Enter the price and your initial cash outlay details. Don't forget closing costs and immediate repairs.
- Loan Details: Input your mortgage terms. A higher interest rate significantly impacts cash flow.
- Expenses: Be realistic. Always account for vacancy (time without a tenant) and maintenance (future repairs), typically estimated as a percentage of gross rent (e.g., 5-10% each).
Use these results to determine if a property meets your investment criteria before making an offer.