Rental Return Calculator

Key Metrics

• Monthly Net Income: The income remaining after all monthly expenses are paid. - The amount of money left over each month after paying all expenses including mortgage, property tax, insurance, maintenance, vacancy allowance, and property management fees.
• Annual Cash Flow: The total yearly income remaining after all expenses. - The yearly sum of all monthly net income, representing how much money the property generates annually after all expenses.
• Cash on Cash Return: Annual cash flow divided by the initial investment, expressed as a percentage. - Measures the return on the actual cash invested (down payment), expressed as a percentage. It's calculated by dividing annual cash flow by the cash invested.
• Cap Rate: Net operating income divided by the property value, expressed as a percentage. - The capitalization rate measures the property's annual return percentage, independent of financing. It's calculated by dividing the net operating income (NOI) by the property's purchase price.
• Return on Investment: Total annual return (including cash flow and appreciation) divided by the initial investment. - Return on Investment considers the overall return including cash flow and potential property appreciation relative to your initial investment.

How Returns Are Calculated

This calculator uses industry-standard formulas to estimate rental property returns based on your inputs:

• Mortgage Payment: Calculated using the loan amount, interest rate, and loan term. - Calculated using the standard amortization formula that considers loan amount, interest rate, and loan term.
• Operating Expenses: Includes property tax, insurance, maintenance, property management fees, and vacancy allowance. - The sum of property tax, insurance, maintenance costs, vacancy allowance, and property management fees.
• Net Income: Monthly rent minus all expenses (mortgage payment and operating expenses). - Monthly rent minus all expenses (mortgage payment and operating expenses).

Interpreting the Results

Different investment markets have different benchmarks for good returns, but here are some general guidelines:

• Cash on Cash Return: 5-8% is considered average, 8-12% is good, and above 12% is excellent. - Generally, 8-12% is considered good for most markets. Higher returns often come with higher risk or in emerging markets.
• Cap Rate: 4-5% is low but may be acceptable in prime areas, 5-8% is good, and above 8% is excellent. - Typically, 4-10% is common depending on the market. Higher cap rates often indicate higher risk or properties in less desirable areas.
• ROI: 7-10% is average, 10-15% is good, and above 15% is excellent when accounting for both cash flow and appreciation. - Should ideally exceed alternative investment options like stocks or bonds to justify the higher effort involved in real estate.

For a comprehensive investment analysis, it's important to consider both the immediate cash flow metrics (like cash on cash return) and long-term value metrics (like appreciation potential and equity buildup).

Important Disclaimer

These calculations provide estimates based on the information entered. Actual returns may vary based on market conditions, property management, and other factors.

This calculator assumes a fixed interest rate and does not account for potential changes in property value, rental rates, or expenses over time. For a comprehensive investment analysis, consult with a qualified real estate investment advisor.

Remember that real estate investments can also benefit from other advantages not calculated here, such as tax benefits, principal paydown, and forced appreciation through property improvements.