Rental Property Calculator

This Page Was Last Updated: August 16, 2022
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Inputs
$
%
Down Payment
$
=
%
years
%
$
Avg. Vacant Months in a Year
months
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%
$
/year
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/year
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/year
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Results
Return On Investment
12.48%
Monthly Income
$1,125.00
Monthly Expenses
$375.00
Cap Rate
4.50%
Initial Investment
$31,000.00
Annual Cash Flow
$9,000.00
Internal Rate of Return
8.14%
Cash-on-Cash
2.26%

What You Should Know

  • Net income, operating costs, financing costs, and the cost of investment are the main components of calculating the return your rental property generates
  • Operating costs for a rental property are the expenses related to keeping the rental property operating on a day-to-day basis
  • Financing costs are the expenses related to taking out a loan to finance the purchase of a rental property, which include the principal and interest payments made
  • Capitalization rate is used when the rental property is purchased using only cash, while ROI is used when you take out a loan to purchase a rental property
  • Rental properties are an attractive investment opportunity because of the passive income they offer, the tax benefits, and the appreciation in the property’s value

The return on investment of a rental property depends on more than just the purchase price of the property and the amount of rent that you collect every month. Other factors increase the cost of investment, such as if you are using a loan to finance your property purchase, the interest rate of your loan, and additional closing costs for the property.

Operating expenses can add up, such as property tax, insurance, and maintenance expenses. Your rental property might not be occupied all the time, so an estimated vacancy rate will also take away from your estimated monthly rent income.

Knowing these values, such as your estimated net income, return on investment, and capitalization rate is key when deciding whether or not to rent out your property, and is crucial when comparing investment properties.

Net Income

The main income of rental properties is the rent tenants pay to live in the property. This will be the main cash flow for an investor. However, keep in mind that more income can be generated if you decide to sell your property in the future. At this point in time, the property will have probably appreciated in value and you will get a large one-time return in the year in which you sell it.

The monthly net income you will receive will depend on a number of factors, such as the rent you choose to charge, whether you will provide any other building facilities for which you can charge, how much it will cost you to maintain the property, etc.

  • Monthly Rent

In order to choose how much rent to charge, you should consider the value of your property. For example, it is considered reasonable for the rent to be 0.8% to 1.1% of the purchase price of the rental property. Thus, if it cost you $300,000 to purchase the house, you can charge your tenants a rent of $2,400 to $3,300. Sometimes, monthly rent may be less than expected because of people moving in and moving out in the middle of the month. In these cases, a landlord may have to calculate prorated rent for the tenants to pay.

  • Other Income

Other income can be earned in the case when you decide to offer various amenities in the building. For example, you could charge the tenants money for using the building’s laundry room, or access the swimming pool.

  • Vacancy Rate

Net income is different depending on if you paid for your property with cash, or if you financed your investment property using a mortgage. If you bought your property with cash, your net income is simply your annual rental income subtracted by your operating expenses for the year, also known as the net operating income. On the other hand, if you financed your property, such as with a mortgage, then your net income is your annual rental income subtracted by your operating expenses and your mortgage payments. The mortgage payment includes both the mortgage principal and interest payment.

Operating Expenses

Operating expenses for a rental property are costs that you will have to pay to keep your rental property running. This includes property tax,insurance expenses, maintenance expenses, and depreciation. Operating expenses will need to be deducted from your total income in order to find the net income a property generates.

  • Property Taxes

It is typically the landlord’s responsibility to pay the property taxes on a rental property, even though some landlords might incorporate the property taxes in the rental price they charge tenants. These taxes will largely depend on the value of your property and the state that you live in. For example, property taxes in Alabama are much lower than property taxes in New Jersey.

  • Homeowner’s Insurance

A landlord will have to pay homeowner’s insurance that will help to cover losses or damages in case that incidents happen to the property or in the property. It provides dwelling coverage, personal property coverage, liability coverage, and coverage for other structures such as a detached garage. The landlord will have to pay insurance premiums based on how big the liability limit is, what incidents it covers, and the value of the property.

  • Landlord Insurance

For full-time rental properties, you will need a landlord insurance policy. While landlord insurance is not legally required, you might not be able to get regular home insurance if you are renting your property to others without landlord insurance. Landlord’s insurance covers items used to service your rental property, such as lawnmowers or snow blowers on-site at your rental property. Tenants can cover their personal belongings through renters insurance. Renters insurance is paid by your tenants, and not directly by you.

Landlord insurance usually provides liability coverage to your rental property. If a tenant is hurt, then your liability coverage can cover expenses. Homeowners insurance only covers you and your relatives who live in your home and does not cover tenants.

  • Maintenance Expenses - Property Management

While buying an investment property can seem like the easiest way to get some passive income, the truth is that a lot of work and energy is required in maintaining rental properties. You are not only an investor but also a landlord who has a ton of responsibilities and tasks to take care of on a regular basis to manage the property and its tenants. The good news is that property management companies exist that can take this weight off your shoulders and do the work for you in exchange for a fee, which is usually calculated as a percentage of the monthly rent. This fee is typically 8% - 12%.

  • Maintenance Expenses - Repairs

A good rule of thumb to estimate the maintenance costs of repairs and replacements is to forecast that 1% of the home purchase price will annually go towards these types of expenses. The landlord is usually responsible for making the repairs needed in a property, especially when these relate to the wear and tear of the home.

  • Maintenance Expenses - Utilities

There are different arrangements of how utilities can be split between the landlord and the tenant. You may choose to charge the tenant a flat fee for utilities and include it in the rent or the tenant can pay for the utilities that they use every month. For example, utilities such as electricity and water will largely depend on the tenant’s use of them.

It is worth mentioning that older properties have typically higher operating expenses since more money is needed to maintain them.

Financing Cost

Most people usually cannot afford to pay the whole purchase price of a rental property in cash, which is why they may choose to get a loan for the investment property. If this is the case, then you will have to pay interest on your loan. How much you put down, your interest rate and your loan term will determine the financing costs that you will have to make in a given month.

The financing costs will be deducted from your total income to find the net income the property generates. The higher the financing costs, the lower the net income. While financing the rental property through a mortgage lets you have more flexibility with your money at first, it also means that you will end up using most of your rental income to pay off your mortgage and other expenses.

The financing costs mainly consist of the monthly mortgage payments you will have to make which are made up of the principal and the interest payments. The inputs on our calculator help determine this payment.

  • Down Payment

The down payment will affect the mortgage payment you make as well as the cost of investment, as we will see below. All else the same, a higher down payment will result in a lower monthly payment. This means that the financing costs will be lower.

  • Interest Rate

A lower interest rate will result in a lower mortgage payment, less financing costs, and ultimately a higher return on your investment.

  • Loan Term

A shorter loan term will typically result in a higher monthly payment and vice versa. While a longer-term loan with its lower monthly payment may result in a higher annual return for your investment property, overall, you will end up paying more in interest throughout the life of your loan. This means that the overall total return on your investment, in the end, will be lower.

Example: 15-Year vs 30-Year Loan Term

Imagine that you want to purchase a rental property that costs $250,000. You make a 20% down payment and the interest rate is 3%. The operating expenses throughout the year are expected to be $6,000 and you will charge a monthly rent of $2,500. You have the option of choosing between a 15-year loan term and a 30-year term. What will be the financing costs and the return on your investment in each case?

15 - Year30 - Year
Total Rental Income$30,000$30,000
Down Payment$50,000$50,000
Mortgage Payment$1,381$843
Total Financing Costs$16,572$10,116
Total Operating Costs$6,000$6,000
Return on Investment14.856%27.768%

The return on investment for one year with a 15-Year loan will be 14.856%, while the return on your investment with a 30-Year loan will be substantially higher at 27.768%. As you can tell, the difference is made by the financing costs, which are lower for the 30-Year loan. The $6,456 annual mortgage savings can then be used for investing, such as putting it towards a down payment on another rental property. The lower cash flow requirement also means that it’s more flexible should your rental income drop temporarily.

Cost of Investment

The purchase information on the rental property calculator serves to find the cost of the investment when you purchase the rental property. When the rental property is bought using cash only, the cost of investment is the whole purchase price of the house. There can still be closing costs when buying with cash, but they are only recommended and largely optional, such as a home inspection, appraisal, and title insurance. In the second case scenario, when a loan is used to finance the purchase of the investment property, we use three components to calculate the cost of investment:

  • Down Payment

Now, the cost of investment will not be the whole purchase price but only the amount that you have put down, or invested in order to purchase the investment property. The amount that the lender finances will not be included in the cost of investment.

  • Closing Costs

Since in order to get a loan from the lender, you will have to spend a substantial amount of money on closing costs, this expense will need to be included in the cost of investment. It is a cost that you need to make in order to get the loan and finally purchase the investment property.

  • Repairs

Any large expenditures made that have an impact on the value of the property should be included in the cost of investment.

Profitability Metrics of a Rental Property

There are four common metrics used to estimate how profitable an investment property is: Return on Investment (ROI), Capitalization Rate (Cap Rate), Cash-on-Cash (CoC), and Internal Rate of Return (IRR). ROI, Cap Rate and CoC are similar metrics in their approach to calculate the return. ROI and Cap Rate compare net income a property generates over a specific period of time to either the value of a property or value of an investment. Return on investment compares net income to the cost of an investment or the amount an investor paid for a property. On the other hand, capitalization rate compares net income to the market price of the property. This section looks closely at both of these metrics and compares them between each other. Cash-on-Cash ratio compares the cash inflows relative to the cost of an investment. CoC ratio is similar to ROI, but it does not include the principal payment for the mortgage if a property is financed.

The following list provides clear definitions of what each metric in this calculator means.

  • Return on Investment (ROI)

ROI calculates the average of how much income a rental property generates compared to the amount invested. A part of income from a rental property may go to building equity on the property.

  • Cash-on-Cash (CoC)

CoC calculates how much cash a rental property generates compared to how much cash has been invested. If a property is financed, then part of the income a property generates goes towards building equity. Since the building equity part of generated income is not returned as cash, it is not included in the calculation.

  • Capitalization Rate (Cap Rate)

Capitalization rate looks at how much income a rental property generates compared to the house price. Capitalization rate does not take into account financing of a property. It assumes that the property is fully financed.

  • Internal Rate of Return (IRR)

IRR is widely used in finance to estimate the profitability of a project. It is a discount rate that makes the net present value of all future cash flows equal to zero. In this case, IRR accounts for a gain that comes with a sale of a house. This means that it estimates the return given that a property will be sold at a certain point in the future.

Internal rate of return also provides an insight about the profitability of a rental property, but it has a different approach compared to the other three metrics. IRR focuses on a net present value (NPV) of a rental property. A net present value is a sum of future cash flows discounted to the present day. IRR is found by looking for a discount rate that makes NPV equal to 0.

How to Calculate ROI on a Rental Property

Return on investment (ROI) is a ratio between the return (profit) from an investment over the cost of the investment. This means that ROI shows how much you will make from your rental property as a percentage of the total cost per year, and can be used to see if your rental property is worth the investment.

There are different ways to calculate ROI for different investment purposes. Some people may prefer to calculate ROI on the whole investment while others may choose to calculate the gain based on the price per square foot. Return on investment for rental properties is usually calculated using a net income and the cash paid to acquire the property, which is called an investment cost of the property.

A positive ROI figure means that you are making money, while a negative ROI will mean that you are losing money. Likewise, a higher ROI means that you are making more money per dollar invested, suggesting that your investment is producing fruitful returns. However, unreasonably high ROIs may prompt a second look.

If a property is bought with cash only, then the investment cost is equal to the price of the property plus closing costs and any repairs made to the property. On the other hand, if a property is financed with a mortgage, then the investment cost is equal to the down payment plus closing costs and any repairs made to the property.

To calculate the ROI of a rental property, you would first need to calculate your rental property’s net income and operating expenses. You may also need to include financing expenses such as interest expenses if you financed your rental property with a mortgage.

A positive ROI figure means that you are making money, while a negative ROI will mean that you are losing money. Likewise, a higher ROI means that you are making more money per dollar invested, suggesting that your investment is producing fruitful returns. However, unreasonably high ROIs may prompt a second look.

Borrowing to invest means that your ROI will be higher as your initial upfront cost is lower than paying in full with cash, but it also means that you are susceptible to mortgage rates that may change over time. High mortgage rates may eat away a big part of your return on investment. Borrowing also creates a risk of default in the event you cannot pay for a mortgage. If you cannot pay for a mortgage, your property may be put into a pre-foreclosure, and you would have to be forced to sell it at a loss.

How to Calculate Cap Rate on a Rental Property

The capitalization rate, also known as the cap rate, measures your property’s annual return relative to the value of the property. In other words, it measures the return on investment (ROI) if the property was purchased fully with cash. This means that return on investment and capitalization rate are the same for properties that are purchased with cash. Capitalization rate can be used to find out how long it will take for your investment to be paid back.

Using capitalization rate, you can find how long it will take for your investment to pay for itself. After finding an annual capitalization rate, you can use the following formula to calculate how many years it will take for your property to pay for itself.

How to Calculate Cash-on-Cash Ratio for a Rental Property

Cash-on-Cash ratio calculates how much cash a rental property generates compared to how much cash has been paid for it. In other words, it is a ratio of cash flow to investment cost of a rental property.

This metric is very similar to ROI. The only difference between them is that ROI looks at net income while CoC looks at cash flow. When it comes to rental properties, the difference between net income and cash flow is the principal mortgage payment. Principal mortgage payments are not subtracted from net income because it is not an expense even though it does require a cash payment. On the other hand, cash flow does not account for principal mortgage payments because even though it is part of income, it does not come in the form of cash. The following formulas are used to calculate the cash-on-cash ratio.

Generally speaking, cash-on-cash tend to be lower than ROI

How to Calculate IRR on a Rental Property

Before jumping into the discussion about IRR, it is important to understand what net present value (NPV) is, and how it changes when cash flows and discount rates change. NPV is a sum of all future cash flows of a rental property where each cash flow is discounted by a chosen discount rate.

NPV can be positive or negative depending on the value of future cash flows (Ci) and discount rate (r). For example, IRR is a discount rate that makes the net present value of rental property cash flows equal to 0. This rate of return may be insightful when a rental property generates inconsistent returns year over year. If the returns are inconsistent, then the variables like ROI and CoC may not be as insightful while IRR may provide a more accurate measure of return.

Example - IRR in Real Estate

You purchase a rental property paying $150,000 in cash. You charge a rent of $1,000 per month and incur operating expenses of $300 every month. In 5 years, you sell the rental property for $180,000.

Yearly Cash Flow = 12 * (Monthly Rent - Operating Expenses) = 12 * ($1,000 - $300) = $8,400
Initial Investment = $150,000
Cash Inflow Year 1 - 4 = Net Income = $8,400
Cash Flow Year 5 = Cash Inflow from Sale + Net Income = $180,000 + $8,400= $188,400

A discount rate that makes NPV equal to 0 is 8.945%. This discount rate is the internal rate of return (IRR) for the property you purchased.

Cap Rate Versus ROI

Cap rate is based on the property being paid in full in cash. If your rental property was paid in cash, the cap rate of your rental property will be the same as your return on investment figure. If your rental property is financed, then you would use ROI instead of the cap rate.

The difference in Cap Rate and ROI stands only in the means you use to finance the purchase, which decides whether you will have to spend money on financing costs throughout the year and the cost of your investment. If you purchase the property using only cash, there are no financing costs which makes you have a higher net income. However, the cost of your investment is also larger since you will have to finance the purchase with your own money. In this case, we use Cap Rate.

Cap RateROICoC
Used when you finance the property through:Cash-onlyLoanLoan
Financing Costs$012 × Monthly Loan Payment12 × Monthly Mortgage Payments
Cost of InvestmentPurchase Price + Closing Costs + RepairsDown Payment + Closing Costs + RepairsDown Payment + Closing Costs + Repairs

Example - Cap Rate vs ROI

Tom and Linda are both rental property investors looking for their next project. Tom has saved up a lot of money and plans to purchase a rental property using cash only. Linda, on the other hand, will need to use a loan to finance the investment. Tom argues that since he won’t have to pay any financing costs, he will have a bigger return on the investment. However, Linda thinks the opposite. Since the initial investment will cost her less, she thinks she will earn a higher return on it. Who is right?

Purchase Price = $350,000

Closing Costs = $5,000

Down Payment = 20%

Loan Term = 15-Years

Interest Rate = 3%

Rental Income = $3,500/month

Operating expenses = $8,000

Since Tom uses cash only, we will use the Cap Rate to measure his return and ROI to measure Linda’s return.

Cap Rate - TomROI - Linda
Total Income$3,500 * 12 = $42,000$3,500 * 12 = $42,000
Operating Costs$8,000$8,000
Financing CostsN/A$1,180 * 12 = $14,160
Net Income$34,000$19,840
Purchase Price$350,000$350,000
⇒ Down PaymentN/A$70,000
Closing CostsN/A$5,000
Cost of Investment$350,000$70,000 + $5,000 = $75,000
Return($34,000/$350,000) * 100 = 9.714%($19,840/$75,000) * 100 = 25.453%

In this case Linda has a higher return on investment than Tom does because she paid less upfront for the property. Generally, return on investment should yield a higher return than a capitalization rate whenever a property is financed with a mortgage.

Example - CoC vs ROI

Now suppose that Linda is a recent graduate, and she does not have that much money saved up. She likes the return on investment she gets, but she also wants to know how much cash she will be getting to supplement her current income. She wants to calculate the cash return on the cash she invested and compare it to the return on investment. In her case, the main difference between the income she receives and cash she receives from the property comes from principal payments she makes on the property. When it comes to her income, she includes principal payments in her income because she builds equity for her house. On the other hand, she does not include principal payments in her cash flow calculations because she does not receive the principal amount in cash when building equity.

Purchase Price = $350,000

Closing Costs = $5,000

Down Payment = 20%

Loan Term = 15-Years

Interest Rate = 3%

Rental Income = $3,500/month

Operating expenses = $8,000

CoCROI
Total Income$3,500 × 12 = $42,000$3,500 × 12 = $42,000
Operating Costs$8,000$8,000
Financing Costs$1,934 × 12 = $23,208$700 × 12 = $8,400
Net Income$10,792$25,600
Purchase Price$350,000$350,000
⇒Down Payment$70,000$70,000
Closing Costs$5,000$5,000
Cost of Investment$70,000 + $5,000 = $75,000$70,000 + $5,000 = $75,000
Return($10,792/$75,000) × 100 = 14.39%($25,600/$75,000) × 100 = 34.13%

After doing all necessary calculations, Linda comes to a conclusion that her return on investment is much higher than her cash-on-cash. This means that even though her property generates a high return, most of the generated income goes to paying off her mortgage. Even though her cash-on-cash is lower than return on investment, she still gets to receive a good portion of cash every month from the property.

How is Capital Gains Calculated on Sale of Rental Property

To calculate capital gains from your rental property sale, you will need to first calculate the cost basis of the property and the net proceeds from the sale of the property.

The cost basis is the cost of any improvements that you made to your rental property, such as remodels or a new roof, in addition to the original amount you paid for your rental property along with purchasing costs, such as closing costs and appraisal fees.

Net proceeds is your rental property sale price, with costs, subtracted, such as real estate agent commissions, staging, and lawyer fees.

To find the capital gain, you would subtract the total cost basis from your net proceeds. A positive capital gain would mean that you made money, while a negative capital gain would be a loss. Capital gains tax may apply. To avoid capital gains tax, you may consider selling your property using a 1031 exchange that allows you to exchange one property for another without paying capital gains tax.

Why Invest in Rental Properties?

Rental properties are an attractive investment opportunity for a number of reasons:

  1. Passive Income Source

    Even though there are a lot of responsibilities to being a landlord, you still have to put in less time and effort than you would in a regular job. Moreover, by hiring a property management firm, there is even less for you to do. This makes rental properties a great investment opportunity that constantly generates income.

  2. Tax Benefits

    When you own a rental property, there are a number of expenses that you can write off to lower your tax obligation when you file your income tax return. These expenses include:

    • Interest - if you purchase your investment property through a loan, you get to deduct the mortgage interest you have paid for during the year in your yearly income tax return.

    • Depreciation - Rental property owners can depreciate their property by 3.636% yearly over 27.5 years. They can write off this depreciation as an expense when filing their income tax return.

    • Repairs - Any repairs you make on the rental property can be deducted from the tax return on the year during which you made the repairs.

    • Insurance - You can deduct insurance premiums that are related to your rental property and to you as a landlord. For example, you can deduct landlords insurance premiums from your income tax returns.

  3. Long-term Appreciation

    Just like any other property, your rental property will typically appreciate in value as the years go by. This will be a major asset for you as you can choose when to sell it to earn a large return.

  4. Inflation Effect

    Inflation typically lowers the value of assets. However, investing in real estate can be safer as the value of the properties rises and lowers with inflation. Therefore purchasing a rental property can be a good way for your wealth not to be largely affected by inflation.

  5. Greater Diversification of assets

    Diversifying assets is a good strategy to lower the total risk of your investments. Therefore, if you have most of your assets stored in other markets, investing in real estate and diversifying your portfolio might help offset that risk.

Any calculators or content on this page is provided for general information purposes only. Casaplorer does not guarantee the accuracy of information shown and is not responsible for any consequences of its use.