The loan's payments cost 7.98% of the amount borrowed each year, more than the 6.69% cap rate, so borrowing lowers the cash return on your own money.
The property collects $29,640.00 of rent in year 1 and costs $9,571.20 to run, an NOI of $20,068.80 and a 6.69% cap rate. After $17,963.17 of mortgage payments you keep $175.47 a month, a cash-on-cash return of 2.51% on the $84,000.00 you invested. Selling after 10 years for $403,174.91 gives an IRR of 12.13% and a total profit of $152,341.18 before tax.
Property tax, insurance, HOA dues, maintenance and other costs, plus management as a share of rent collected. Mortgage payments are not operating costs.
Solved numerically on the yearly cash flows, before income tax.
About the rental property calculator
Net operating income (NOI) is the rent you collect after vacancy, minus operating costs: property tax, insurance, HOA dues, maintenance, management and other running costs, but not the mortgage. The cap rate is NOI divided by the purchase price. Cash flow is NOI minus the year's mortgage payments, and the cash-on-cash return divides it by the cash you put in: down payment plus closing and repair costs.
With the defaults, a $300,000 property bought with 25% down at 7% and rented for $2,600 a month has a year-1 NOI of $20,068.80, a 6.69% cap rate and $175.47 a month of cash flow, a 2.51% cash-on-cash return on $84,000. Sold after 10 years at 3% yearly appreciation, it returns an IRR of 12.13%.
Rent, costs and value grow at the rates you set. Income tax, depreciation and capital-gains tax are left out, so every figure is before tax.
How to calculate rental property cash flow and cap rate
Net operating income (NOI) is the rent you collect minus operating costs, before the mortgage. Cap rate = NOI ÷ price, and cash flow = NOI − mortgage payments. A 300,000 rental at 2,600 a month, bought with 25% down at 7%, has an NOI of 20,068.80, a 6.69% cap rate and 175.47 a month of cash flow.
Rental cash flow worked by hand
Scheduled rent: 2,600 × 12 = 31,200.
Rent collected: with 5% vacancy and unpaid rent, 31,200 × 0.95 = 29,640.
NOI and cap rate: 29,640 − 9,571.20 = 20,068.80, and 20,068.80 ÷ 300,000 = 6.69%.
Mortgage: 225,000 at 7% over 30 years costs 1,496.93 a month; twelve unrounded payments total 17,963.17.
Cash flow: 20,068.80 − 17,963.17 = 2,105.63 a year, or 175.47 a month.
Cash-on-cash return: 2,105.63 ÷ 84,000 = 2.51%, where 84,000 is the 75,000 down payment plus 9,000 of closing and repair costs.
Mortgage principal and interest are not operating costs, so NOI is the same however the purchase is financed.
Cap rate, cash-on-cash, DSCR and GRM
Cap rate compares properties regardless of financing. Appraisers turn it around as value = NOI ÷ cap rate: if similar rentals sell at a 7% cap rate, an NOI of 20,068.80 points to a value of 286,697.14.
Cash-on-cash return is year-one cash flow ÷ cash invested, the yield on your own money.
Debt service coverage ratio (DSCR) is NOI ÷ yearly mortgage payments: 20,068.80 ÷ 17,963.17 = 1.12. Below 1.0 the rent does not cover the loan, and lenders that qualify on rental income set their own minimum.
Gross rent multiplier (GRM) is price ÷ scheduled yearly rent: 300,000 ÷ 31,200 = 9.62. It ignores vacancy and costs, so use it only as a first screen.
Rental property examples
Scenario
First-year NOI
Monthly cash flow
Modeled IRR (%)
Default
20068.80
175.47
12.13
Cash purchase
20068.80
1672.40
9.22
Negative cash flow
12727.20
-920.56
1.29
Default is the example above, sold after 10 years. Cash purchase pays the full 300,000 with no closing costs, so the whole NOI is cash flow.
Negative cash flow puts 10% down at 8% and rents for 1,900. Its 1,981.16 payment is far above the 1,060.60 of monthly NOI, a DSCR of 0.54.
When borrowing lowers the return
Borrowing at a rate above the cap rate lowers the cash return. In the first example the loan costs 7% while the property yields 6.69%, so cash-on-cash is 2.51%, against 6.69% for the cash purchase in the table.
At a 6% loan rate the payment falls to 1,348.99 and cash-on-cash rises to 4.62%. Borrowing raises the yearly return only when the property yields more than the debt costs.
How the sale drives the IRR
The internal rate of return (IRR) adds the sale to the yearly cash flows. After 10 years of 3% growth the first property is worth 403,174.91.
Less 6% selling costs and the 193,077.86 still owed, the sale returns 185,906.56. With the ten years of cash flow, the IRR on the 84,000 invested is 12.13%.
The growth assumption carries much of that figure. At 1% a year the IRR is 8.27%, and with no growth it is 6.06%. Rent, operating costs and value each grow at a constant rate you choose, which no market guarantees.
Costs that are easy to leave out
Vacancy: at 10% instead of 5%, cash flow in the first example falls to 55.87 a month.
Management: 8% of rent collected in the example. Leaving it out assumes your own time is free.
Large repairs: a maintenance allowance spreads costs evenly, while a new roof or furnace arrives as one bill.
Owner-paid costs: utilities, landscaping, accounting and licenses.
All figures are before income tax. Depreciation, deductible expenses and tax on the sale change the after-tax return; IRS Publication 527 covers how US rental income and expenses are taxed.
Inputs that change the result
Vacancy applies to rent and any other income, such as parking or laundry fees.
Management is a percentage of rent collected, not of scheduled rent.
Closing and repair costs at purchase are paid in cash and added to the cash invested, not to the loan.
Holding period: if it runs past the loan term, later years have no mortgage payment; no refinance is assumed.
Checked against: Yearly rent and costs grown at 3%, month-by-month amortization, IRR by 300 bisection steps on the NPV of the ten yearly flows plus sale proceeds
Cash purchase with no growth or costs
Purchase price
300,000
Down payment
100%
Closing costs and repairs at purchase
0
Loan interest rate (per year)
7%
Loan term
30 years
Monthly rent
2000
Other monthly income
0
Vacancy and unpaid rent
0%
Property management (% of rent collected)
0%
Property tax (per year)
0
Insurance (per year)
0
HOA dues (per month)
0
Maintenance and repairs (per year)
0
Other operating costs (per year)
0
Property value growth (per year)
0%
Rent growth (per year)
0%
Operating cost growth (per year)
0%
Years until sale
5 years
Selling costs (% of sale price)
0%
Net operating income (year 1)
24,000.00
Cap rate
8.00%
Cash-on-cash return (year 1)
8.00%
Internal rate of return (IRR)
8.00%
Total profit
120,000.00
Gross rent multiplier
12.50
Mortgage payment per month
0.00
Checked against: Hand calculation: 2,000 × 12 = 24,000 ÷ 300,000 = 8%; five years of 8% cash yield with the price returned at the end is an 8% IRR
Zero-rate loan, 5-year hold
Purchase price
300,000
Down payment
25%
Closing costs and repairs at purchase
9000
Loan interest rate (per year)
0%
Loan term
30 years
Monthly rent
2600
Other monthly income
0
Vacancy and unpaid rent
5%
Property management (% of rent collected)
8%
Property tax (per year)
3300
Insurance (per year)
1500
HOA dues (per month)
0
Maintenance and repairs (per year)
2400
Other operating costs (per year)
0
Property value growth (per year)
3%
Rent growth (per year)
3%
Operating cost growth (per year)
3%
Years until sale
5 years
Selling costs (% of sale price)
6%
Mortgage payment per month
625.00
Cash flow (year 1)
12,568.80
Cash-on-cash return (year 1)
14.96%
Internal rate of return (IRR)
24.27%
Cash from the sale
139,415.29
Equity at sale
160,282.22
Checked against: as above: 225,000 ÷ 360 = 625 a month; balance after 60 payments 187,500; value 300,000 × 1.03^5
Negative cash flow with 10% down (edge)
Purchase price
300,000
Down payment
10%
Closing costs and repairs at purchase
9000
Loan interest rate (per year)
8%
Loan term
30 years
Monthly rent
1900
Other monthly income
0
Vacancy and unpaid rent
5%
Property management (% of rent collected)
8%
Property tax (per year)
3300
Insurance (per year)
1500
HOA dues (per month)
0
Maintenance and repairs (per year)
2400
Other operating costs (per year)
0
Property value growth (per year)
3%
Rent growth (per year)
3%
Operating cost growth (per year)
3%
Years until sale
10 years
Selling costs (% of sale price)
6%
Net operating income (year 1)
12,727.20
Cash flow per month (year 1)
-920.56
Cash-on-cash return (year 1)
-28.33%
Debt service coverage ratio
0.54
Internal rate of return (IRR)
1.29%
Checked against: as above: 270,000 at 8% costs 1,981.16 a month, more than the 1,060.60 of monthly NOI
Questions
How do you calculate cap rate?
Divide the year's net operating income by the property's price or value and multiply by 100. NOI is collected rent minus operating costs, before mortgage payments. A property earning $24,000 of NOI on a $300,000 price has an 8% cap rate. Because financing is left out, the cap rate compares properties regardless of how each is paid for; it is the direct-capitalization rate appraisers use in value = NOI ÷ rate.
What is the difference between cap rate and cash-on-cash return?
Cap rate ignores the loan; cash-on-cash return includes it. Cap rate = NOI ÷ price, and cash-on-cash = (NOI − mortgage payments) ÷ cash invested. With the defaults, NOI of $20,068.80 on $300,000 is a 6.69% cap rate, but after $17,963.17 of mortgage payments the $2,105.63 of cash flow is 2.51% of the $84,000 invested. Borrowing at a rate above the cap rate lowers the cash return.
What is net operating income on a rental property?
Rental income collected, after vacancy, minus the costs of running the property: property tax, insurance, HOA dues, repairs and maintenance, management and utilities you pay. Mortgage principal and interest, depreciation and income tax are not operating costs. On the defaults, $31,200 of scheduled rent less 5% vacancy is $29,640 collected; $9,571.20 of costs leaves an NOI of $20,068.80.
What does the debt service coverage ratio mean?
DSCR is NOI divided by the year's mortgage payments. At 1.0 the rent just covers the loan after operating costs; below 1.0 you pay the shortfall from other income. The defaults give 20,068.80 ÷ 17,963.17 = 1.12, and the 10%-down example at 8% gives 0.54. Lenders that qualify a loan on the property's income set their own minimum DSCR, so ask for yours before you rely on the rent.
For planning only. Lenders, tax authorities and markets apply their own rounding, fees and rules; confirm figures with them before you commit.
Checked against references
This calculator includes 4 worked examples with independently sourced answers. They run in the test suite, and you can run them here too.
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