Rental Property ROI Calculator
Analyze Cash Flow, Cap Rate, and Cash on Cash Return
Analysis Results
Understanding Your Rental Property ROI
Investing in real estate is one of the most reliable ways to build wealth, but simply buying a property doesn't guarantee profit. To ensure an investment makes financial sense, you must analyze the numbers thoroughly. This Rental Property ROI Calculator is designed to help investors evaluate the profitability of a potential purchase by looking at key metrics like Cash Flow, Cap Rate, and Cash on Cash Return.
Key Investment Metrics Explained
1. Cash on Cash Return (CoC)
This is arguably the most important metric for rental investors. It measures the annual return on the actual cash you invested (down payment + closing costs), rather than the total price of the property. A CoC return of 8-12% is generally considered good, though this varies by market.
Formula: Annual Cash Flow / Total Cash Invested
2. Cap Rate (Capitalization Rate)
Cap Rate measures the natural rate of return on the property assuming you bought it in cash (no loan). It allows you to compare properties apples-to-apples without the influence of financing terms. A higher Cap Rate generally indicates higher potential returns but may come with higher risk.
Formula: Net Operating Income (NOI) / Purchase Price
3. Net Operating Income (NOI)
NOI represents the total income the property generates after all operating expenses (taxes, insurance, maintenance, vacancy) are paid, but before the mortgage is paid. It is a raw measure of the property's efficiency.
How to Use This Calculator
To get the most accurate results, ensure you are realistic with your expense estimates:
- Vacancy Rate: No property is occupied 100% of the time. A standard conservative estimate is 5-8% (representing about 2-4 weeks of vacancy per year).
- Maintenance: Properties degrade over time. Allocating 5-10% of monthly rent for repairs and capital expenditures (like a new roof or water heater) helps prevent cash flow shock.
- Closing Costs: Don't forget the upfront costs of buying! This typically ranges from 2% to 5% of the purchase price.
Example Scenario
Imagine purchasing a single-family home for $250,000. You put $50,000 down and pay $5,000 in closing costs. The house rents for $2,200/month.
After paying the mortgage, taxes, insurance, and setting aside money for maintenance, if you are left with $300 per month in pure profit, your annual cash flow is $3,600. Since you invested $55,000 total cash, your Cash on Cash return would be roughly 6.5%.