Rental Property Calculator

Rental Property Calculator: Cash Flow, ROI and Cap Rate

You don’t have to sign up to use this rental property calculator, and it’s free. You can enter your numbers and see your all-in-one cash flow, cap rate, cash-on-cash return, and ROI. Most calculators show these numbers as separate boxes, with a cap rate here and a cash flow number there. It’s not clear how one number fits with the next. 

This page is different. We will go through each step of the process for a real property in the list below, so you can see how each number builds on the last one. By the end, you’ll not only know what each metric means but also how they work together to show where a real deal does well or poorly, using math instead of guesswork.

The Example Deal We’ll Analyze

This page will only have one property, so you can follow the same numbers from beginning to end. So here it is:

You put together in a rental property calculator a down payment of $50,000 and paid closing costs of $5,000, for a total of $55,000. The total amount of your monthly mortgage payment, which includes both principal and interest, is $1,264. These numbers will be used all the way through this page.

Step 1: Rental Income Calculator: Start With Gross Rent

Begin with your gross rent, which is the full amount you’d get if the unit were rented out every month of the year.

Gross rent per year = $2,200 x 12 = $26,400

No rental, though, is ever empty all the time. It takes time to screen people, tenants move out, and units sit empty between leases. Based on the market in your area, a reasonable vacancy allowance is between 5 and 8 percent of the gross rent. We’re going to use 5% for this.

Gross income after taxes is $26,400 – (5% of $26,400) = $26,400 – $1,320 = $25,080.

New buyers make their first mistake when they skip this step. If you base your calculations on a rental property calculator, 12 months of full rent every year, your real returns will be less than what you expect when there is a month without renters.

Step 2: Operating Expenses (Where Deals Actually Fail)

Most new buyers don’t give this step enough thought, and it’s often where a deal that looked good on paper ends up losing money. Here is a full list for our sample property:

The maintenance line and the capex reserve are two line items that new investors often don’t look at at all. Maintenance takes care of the small repairs that every rental needs over time. The capex reserve is different. It’s money set aside for big, one-time costs like a new roof, a new water heater, or an HVAC system that stops working. You should set aside money each month for these things, but if you don’t, they will come as a nasty surprise the year they happen.

If you want to make sure you’re not crazy, the 50% rule says that your operating costs, not including your mortgage payment, should be about half of your gross rent. It works out to about 39% of the gross rent of $26,400, which is $10,320. There’s a pretty good lot there. If you think the number will be much lower than 50% and can’t explain why, you may have forgotten something, like the capex reserve or a reasonable management fee.

Step 3: Rental Property Cash Flow Calculator

Now we add up everything we’ve talked about so far to get your actual monthly cash flow.

Earnings minus costs of doing business minus mortgage payment (P&I) equals cash flow.

In the case of our example property, once a year:

Cash Flow = $25,080 – $10,320 – $15,168 = $408 a year

That’s about $34 a month. The cash flow from this property is a little negative. Now, think about this for a moment. This is a real and common result, not a mistake in the math that you need to be aware of. Even if the rent and debt seem fair at first, the property may still be slightly negative when all the real costs are added up. Even though this doesn’t mean it’s a bad investment, it does mean that you won’t get cash back every month. Wait, there’s more! The next few steps will show you where the real money is coming from from this deal.

Step 4: Cap Rate (Comparing Properties Fairly)

A cap rate doesn’t include financing at all, so it can be used to compare two properties, even if you would fund them in different ways.

Cap Rate = Net Operating Income / Price Paid; 100

Net running income, or NOI, is your net income after running costs are subtracted from your gross income but before the mortgage payment:

NOI = $25,080 – $10,320 = $14,760

Cap Rate = $14,760 / $250,000 / 100 = 5.9%

Keep in mind that the mortgage is not used in this calculation; use a rental property calculator. That was done on purpose. Cap rate tells you how well the property does, not how you bought it. This means that you can compare a $250,000 property to a $400,000 property or an all-cash deal to a leveraged deal without any issues. It doesn’t tell you your personal return because that rests on how much you put down and the terms of your loan. That’s the next thing to do.

When investors look at several listings at once, they often use cap rate as a first filter before getting into the specifics of financing any one of them. A property with a cap rate that is much lower than the norm for its area may be overpriced compared to the rent it brings in. On the other hand, on a rental property calculator, a property with an unusually high cap rate should be looked at again to make sure that the numbers, or the neighborhood, aren’t hiding a problem.

Step 5: Cash-on-Cash Return (Your Actual Return)

If you think about money again, this measure asks a more personal question: how hard is your real cash working?

Cash-on-Cash Return = Annual Pre-Tax Cash Flow ÷ Total Cash Invested ÷ 100

We already found that the yearly cash flow is $408. The down payment of $50,000 and the closing costs of $5,000 added up to a total of $55,000.

Cash-on-Cash Return = -0.4% ($408 x $55,000 x 100)

This is usually the most important number for a leveraged investor because it shows how much money they put in and how much they get back every year. It’s slightly negative here, which confirms what we saw in Step 3: this deal isn’t making money every month. But the study isn’t over yet because cash-on-cash return only looks at cash. It doesn’t take into account two other things that are building your wealth in the background. This is exactly what total ROI finds next.

Step 6: How to Calculate Rental Property ROI (The Full Picture)

Return on cash isn’t the whole story. There are two things that total ROI doesn’t take into account at all: how much of your debt your tenant is paying down for you and how much the property is probably going up in value.

Paying down the principal: Each mortgage payment has both interest and principal. The principal part lowers your debt, which builds wealth even if you never sell. The first year’s payments on our $200,000 loan at 6.5% bring down the balance from $200,000 to about $197,765, which is a paydown of $2,235.

Values tend to go up over time, but this isn’t always the case and depends on the market. Using a conservative estimate of 3% yearly growth for our $250,000 home, that’s a $7,500 increase in value in the first year.

Now let’s put all three pieces together for total first-year ROI:

Total ROI = $9,327 ÷ $55,000 × 100 = 17.0%

This number shows why experienced buyers don’t get too upset when their monthly cash flow is slightly negative. The property’s return, which is $9,750 out of a total of $9,327, comes mostly from paying down the debt and the value going up, not from cash on hand. It’s important to know the difference between cash flow and principal paydown and appreciation. Principal paydown and appreciation are real but unrealized gains that you can’t spend until you sell or refinance your home. To get a full picture of rental property ROI, you need to separate the “paper” from the “cash.”

Rental Property Depreciation Calculator

People often forget that depreciation is a tax deduction and not a cash expense. It’s also one of the most overlooked parts of a rental property’s real return. The IRS lets you spread out the cost of a rental home over 27.5 years, but not the land it sits on.

Annual Depreciation = Value of Building (not including land) 27.5 years

For our example property, let’s say that the building is worth $200,000 of the $250,000 purchase price and the land is worth $50,000.

Depreciation per year = $200,000 x 27.5 = $7,273

As a paper tax break, you can take this $7,273 off of your rental income every year without having to pay anything. It lowers your taxable renting income even though you don’t lose any money. This is one reason why real estate investors often pay less tax on rental income than their cash flow numbers show.

For people who aren’t from the US, this 27.5-year method is only used in the US and is based on IRS advice. It doesn’t work the same way in other countries. The UK got rid of its general wear-and-tear allowance and replaced it with a system that gives less money for replacements. Australia and Canada each have their own system, with Capital Cost Allowance (CCA) in Canada and capital works deductions in Australia. Each system has its own rates and rules. If you’re spending outside of the US, don’t use the numbers above that are for the US. Talk to a licensed accountant in your own country to find out what you need to do.

What Counts as a Good Deal?

Each number on this page is only a rental property calculator and not a verdict. Many buyers use these rough guidelines as a place to start, but keep in mind that every market is different and none of these are a sure thing for a good outcome:

• Having enough cash flow. Many investors want at least some monthly cash flow, but some are okay with a small negative number if the principal payment and property value growth make up for it, like in our example.
• Return on cash. 8% to 12% is a typical target range, but it depends a lot on the market and how much risk you are willing to take.
• The rule of 1%. As a quick check, the monthly rent should be about 1% of the price of the house. 1% would mean $2,500 a month in rent on our $250,000 home. The rent we looked at was $2,200, or about 0.88%. This is less than the general rule and matches the low cash flow we found in Step 3. This is a good early filter, but it’s not a full study because it doesn’t look at costs at all.

At this point, investing in a rental property stops being a math problem and starts being a real choice. This rental property calculator’s numbers show what a deal is likely to do. You have to decide for yourself if that fits your goals, your risk level, and your local market. The calculator can’t do that for you.

Conclusion

This rental property calculator is meant to help you learn about real estate wealth tools; it should not be used instead of professional advice. Every number on this page comes from the one example property that was talked about at the beginning. It was broken down into six steps that all worked together to show you how a real deal is analyzed, not just a bunch of separate formulas. 

The rent, costs, and loan for your own property will be different, so use these numbers as a guide for your own math rather than as a standard to meet. This is not tax, investment, or financial advice. Tax rules, such as rules for depreciation, are very different from country to country and from person to person. Utilize a rental property calculator to do your own math and talk to a licensed accountant or financial adviser who knows the local market and your unique situation before you make an offer or sign anything.

FAQs

Q1. How do I calculate cash flow on a rental property?

Take your effective gross income (gross rent minus vacancy loss) and subtract your running costs and mortgage payment. In our case, the difference between the effective gross income of $25,080 and the operating costs of $10,320 minus the mortgage payments of $15,168 is $408.

Q2. What is a good cap rate for a rental property?

Cap rates change based on market, property type, and level of risk, so there is no one answer. This is the range that many investors look for: 5% to 10%. However, cap rates tend to be lower in markets with a lot of demand and higher in markets with more danger. It is always a good idea to look at the cap rate of similar homes in the same area.

Q3. What’s the difference between cap rate and cash-on-cash return?

Cap rate doesn’t take into account financing at all it just looks at how well the building does on its own. Your mortgage is included in your cash-on-cash return, which shows how much you actually made on the money you put in. It turned out that the cap rate was 5.9% and the cash-on-cash return was -0.7%. This is because the personal return was less than the property’s raw performance because of the costs of financing it.

Q4. How is rental property depreciation calculated?

In the US, split the value of the building by 27.5 years, leaving out the land. If we divide the building’s value of $200,000 by 27.5, we get an annual depreciation deduction of $7,273. This rule only works in the US; it’s not the same everywhere else.

Q5. What is the 1% rule in real estate?

As a quick screening guideline, the monthly rent should be about 1% of the price of the house. A quick first look at a property is helpful, but it doesn’t take into account real costs, so it should never be used instead of a full cash flow and ROI analysis.

Q6. Why is my real cash flow lower than I estimated?

This usually comes down to three costs that aren’t taken into account enough: vacancy (units don’t stay rented all the time), maintenance (every property needs small repairs all the time), and capex reserves (money set aside for big, one-time costs like a new roof). Leaving any of these out will make a property look like it makes more money than it really does.