How the Rental Property Calculator Works
The Rental Property Calculator tells you whether a house, flat or other property is likely to make money as a rental. It works out what is left each month after all the costs and the mortgage, how good the return is for the cash you put in, and what you would have made in total if you sold it later.
What you enter
- Purchase price, down payment and mortgage: what you pay, how much of it is your own cash, and the loan's rate and length.
- Closing costs and repairs: the extra cash needed to buy the property and get it ready for a tenant.
- Rent and other income: the monthly rent, and anything extra such as laundry or parking fees.
- Vacancy: the share of the year the home sits empty. About 5% is a common allowance.
- Owner costs: property tax, insurance, maintenance, property management, HOA fees and utilities you pay.
- Growth and sale: how fast rent, costs and the property price rise, the cost of selling, and how many years you plan to hold it.
Step 1: the income and the costs
The calculator starts with a full year of rent, and removes the vacancy to get the rent you really collect. It then takes off the operating costs. Net operating income, or NOI, is what is left before the mortgage is paid:
NOI = rent collected - property tax - insurance - maintenance - management - HOA - utilities
Step 2: the mortgage
The loan payment uses the standard formula, where P is the loan, r is the monthly rate and n is the number of months:
payment = P x r x (1 + r)^n / ((1 + r)^n - 1)
Your cash flow is the NOI minus the year's loan payments. This is the money that lands in your pocket, or that you must add yourself if it is negative.
The numbers investors watch
| Measure | How it is worked out | What it tells you |
|---|---|---|
| Cap rate | NOI / purchase price | The return on the property, ignoring the loan |
| Cash-on-cash return | Yearly cash flow / cash you put in | The return on your own money |
| Debt coverage ratio | NOI / loan payments | How safely the rent covers the loan. Lenders like 1.25 or more |
| Break-even occupancy | Costs plus loan payments / full rent | How full the property must be to cover its bills |
| 1% rule | Monthly rent / purchase price | A quick screen. Many investors look for 1% or more |
| Gross rent multiplier | Purchase price / yearly rent | How many years of rent the price equals. Lower is cheaper |
- Measure: Cap rate
How it is worked out: NOI / purchase price
What it tells you: The return on the property, ignoring the loan - Measure: Cash-on-cash return
How it is worked out: Yearly cash flow / cash you put in
What it tells you: The return on your own money - Measure: Debt coverage ratio
How it is worked out: NOI / loan payments
What it tells you: How safely the rent covers the loan. Lenders like 1.25 or more - Measure: Break-even occupancy
How it is worked out: Costs plus loan payments / full rent
What it tells you: How full the property must be to cover its bills - Measure: 1% rule
How it is worked out: Monthly rent / purchase price
What it tells you: A quick screen. Many investors look for 1% or more - Measure: Gross rent multiplier
How it is worked out: Purchase price / yearly rent
What it tells you: How many years of rent the price equals. Lower is cheaper
A worked example
You buy a $300,000 property with 25% down and a 7% mortgage over 30 years. Closing costs are 3% and repairs are $5,000, so you put in $89,000 of your own cash. The rent is $2,400 a month, with 5% vacancy. Property tax is 1.1% of the price, insurance is $1,500 a year and maintenance is 8% of rent.
| Year 1 | Amount |
|---|---|
| Rent collected | $27,360 |
| Operating costs | $7,104 |
| Net operating income | $20,256 |
| Loan payments ($1,496.93 a month) | $17,963 |
| Cash flow | $2,293 a year, about $191 a month |
| Cap rate | 6.75% |
| Cash-on-cash return | 2.58% |
With 3% a year growth in rent, costs and price, after 10 years the property sells for about $403,175. After selling costs and paying off the loan, you receive $185,907. Adding ten years of cash flow, your total profit is about $149,487, and the yearly return over the whole period is about 11.6%.
Chart: cash flow grows as rent rises
The same example. The loan payment stays the same each year, but rent keeps rising, so the cash flow grows. Amounts are in thousands of dollars:
Year 1 ████████████ 2.3 Year 2 ██████████████ 2.9 Year 3 █████████████████ 3.5 Year 4 ████████████████████ 4.2 Year 5 ███████████████████████ 4.8 Year 6 ██████████████████████████ 5.5 Year 7 ██████████████████████████████ 6.2 Year 8 █████████████████████████████████ 6.9 Year 9 █████████████████████████████████████ 7.7 Year 10 ████████████████████████████████████████ 8.5
How the return over the years is worked out
The calculator lists your money going in and coming out. At the start you pay your cash. Each year you receive the cash flow. In the last year you also receive the sale money. The yearly return, also called the internal rate of return, is the growth rate that makes all of these amounts balance. It counts both the rent you take home and the price growth, and it counts early money as worth more than later money. The equity multiple is everything you get back divided by everything you put in.
What to look for
- Positive cash flow, so the property pays for itself.
- A debt coverage ratio above 1.25, so a bad month does not put you at risk.
- A low break-even occupancy, so you can afford some empty months.
- Test the result. Try a higher vacancy, lower rent and higher costs to see how much room you have.
What this calculator does not include
- Income tax, depreciation and other tax rules.
- Big repairs, such as a new roof, beyond the maintenance percentage you enter.
- Changes in the mortgage rate, if the loan is not fixed.
- Your own time, if you manage the property yourself.
This tool gives an estimate for general information only. It is not financial, tax or investment advice. Real rents, costs and prices will differ from your assumptions, so check local numbers before you buy.