Rental Property Calculator

What this calculator answers

Whether a rental property pays for itself in its first year, and by how much. The headline is the monthly cash flow left after vacancy, operating expenses and the loan payment. From the same figures come the net operating income (NOI), cap rate, cash-on-cash return, debt service coverage ratio (DSCR), break-even occupancy and gross rent multiplier. It is for landlords and buyers sizing up a property to rent out. If you’re deciding whether to rent or buy the home you live in, a rent vs. buy calculator answers that instead.

How to use it

Enter the property as you expect to run it. Money fields accept 168,000, $168,000 or 168k.

• Purchase price, closing costs and repairs before renting: the contract or asking price, the cash you expect to pay at closing, and any make-ready work you pay for before the first tenant moves in.
• How you pay: a mortgage or all cash. With a mortgage, enter the down payment in dollars or as a percentage of the price, the fixed interest rate and the term in years.
• Monthly rent: the total for all units, from the lease or from rents for similar homes nearby. Vacancy is the share of that rent you don’t expect to collect, from empty weeks between tenants and unpaid rent. Other income is anything else the property earns, such as parking, laundry or pet fees, a month or a year.
• Enter expenses: Line by line asks for property tax, insurance, maintenance, management, HOA dues, utilities you pay and a capital-expenditure reserve. Dollar amounts can be a month or a year, whichever your bill shows. Maintenance and management are percentages of rent collected. One % of rent replaces all of them with one percentage, for a first look at a listing.

Results update as you type. The Try buttons load the cases discussed below: all cash, 35% down, managing the property yourself, and the one-percentage shortcut. The What if one number changes tabs rerun everything at other rents, vacancy rates, prices and interest rates. To weigh two offers or two loans, press Save for comparison, change the inputs and save again: each later scenario shows its difference from the first. Continue in the Mortgage Calculator takes the price, down payment, rate, term, tax and insurance there to look at the loan on its own.

How to calculate rental property cash flow

Start from a full year’s rent, then take away, in order, the rent you won’t collect, the cost of running the property and the loan payments:

1. Gross scheduled income: (monthly rent + other income a month) × 12.
2. Effective gross income, the rent collected: gross scheduled income × (1 − vacancy rate).
3. Net operating income: effective gross income − operating expenses.
4. Cash flow before income tax: NOI − debt service, where debt service is a year of monthly principal-and-interest payments.

$$\begin{aligned} \text{EGI} &= (R + O) \times 12 \times (1 - v) \\ \text{NOI} &= \text{EGI} - E - (m + g) \times \text{EGI} \\ \text{cash flow} &= \text{NOI} - 12 \times \text{PMT} \end{aligned}$$

• $R$ is the monthly rent and $O$ the other income a month.
• $v$ is the vacancy rate as a decimal (7% is 0.07).
• $E$ is the year’s fixed-dollar expenses: property tax, insurance, HOA dues, utilities you pay and the reserve.
• $m$ and $g$ are maintenance and management as decimals of rent collected.
• $\text{PMT}$ is the monthly principal-and-interest payment.

The payment is the standard level loan payment, rounded to the cent:

$$\text{PMT} = L \times \frac{i\,(1 + i)^{n}}{(1 + i)^{n} - 1}$$

where $L$ is the loan (price minus down payment), $i$ is the annual rate ÷ 12 and $n$ is the number of monthly payments. In a spreadsheet, =PMT(7%/12, 360, -126000) gives the example’s payment.

What counts as an operating expense (and why the mortgage isn’t one)

Operating expenses are the costs of running and maintaining the property: property tax, insurance, repairs, management, HOA dues, utilities the owner pays and a reserve for replacing big items. The OCC’s handbook for bank examiners leaves out interest, principal, income taxes, depreciation and the capital items themselves. It does count a replacement reserve, whether or not the money is actually set aside. So NOI comes before the mortgage: two buyers of the same house, one paying cash and one borrowing, have the same NOI and different cash flow.

Worked example: a $168,000 house with 25% down

These are illustrative figures, not market data. A single-family house costs $168,000, plus $5,040 of closing costs and $7,500 of paint and flooring before the first tenant. The buyer puts 25% down and borrows the rest at 7% for 30 years. Rent is $1,695 a month plus $30 of pet rent, with 7% vacancy. Property tax is $2,350 a year and insurance $1,450 a year. Maintenance is 8% and management 10% of rent collected, the owner pays $40 a month for water and trash, and the reserve is $135 a month.

1. Gross scheduled income: ($1,695 + $30) × 12 = $20,700.00.
2. Vacancy: $20,700.00 × 7% = $1,449.00, so rent collected is $20,700.00 − $1,449.00 = $19,251.00.
3. Maintenance: $19,251.00 × 8% = $1,540.08. Management: $19,251.00 × 10% = $1,925.10.
4. Operating expenses: $2,350.00 tax + $1,450.00 insurance + $1,540.08 maintenance + $1,925.10 management + $480.00 water and trash ($40 × 12) + $1,620.00 reserve ($135 × 12) = $9,365.18.
5. NOI: $19,251.00 − $9,365.18 = $9,885.82 a year, or $823.82 a month.
6. Loan: $168,000 − $42,000 = $126,000. At 7% ÷ 12 over 360 payments, the payment is $838.28 a month, so debt service is $838.28 × 12 = $10,059.36 a year.
7. Cash flow: $9,885.82 − $10,059.36 = −$173.54 a year, or −$14.46 a month.
8. Cash invested: $42,000 + $5,040 + $7,500 = $54,540.00.

The house comes up $14.46 a month short. It would break even at rent of $1,713.96, which is $18.96 more a month, or at 5.98% vacancy instead of 7%. Any one of these changes from the what-if tabs also turns it positive: 5% vacancy ($13.83 a month), rent of $1,780 ($50.36), a 6.5% rate ($27.41) or a price 5% lower, $159,600 ($27.45).

How to calculate cap rate

Divide NOI by the purchase price: $9,885.82 ÷ $168,000 = 5.88% for the example. The cap rate describes the property, not the financing, so it’s the same whoever buys it and however they pay. The OCC defines it against the sales price. Dividing by the price plus closing costs and repairs instead gives $9,885.82 ÷ $180,540 = 5.48%, an answer to a different question: what the property yields on everything you put into it. Compare cap rates only when NOI is built the same way, with the same vacancy, management and reserve allowances.

How to calculate cash-on-cash return

Divide the year’s cash flow before income tax by the cash you put in: the down payment, closing costs and repairs. For the example, −$173.54 ÷ $54,540.00 = −0.32%. It measures what your own cash earns in year one after the loan payments, so it changes with the down payment, rate and term, while the cap rate doesn’t.

Principal paid down isn’t part of it. In year one the example’s payments include $1,279.91 of principal and $8,779.45 of interest. Cash flow plus that principal is $1,106.37, or 2.03% of the cash invested, but the principal comes back to you only when you sell or refinance.

Cap rate vs. cash-on-cash return

Use the cap rate to compare properties and cash-on-cash return to compare ways of paying for one. The gap between them shows whether the loan helps. In the example, each borrowed dollar costs 7.98% a year in payments ($10,059.36 ÷ $126,000), while each dollar of price earns 5.88% in NOI. When borrowing costs more than the property yields, a bigger loan lowers the return on your cash:

Paid in cash, the cash-on-cash return equals the all-in yield from the section above. Part of every loan payment is principal that you keep as equity, so this table compares cash in hand, not total return.

Reading the result

• Monthly cash flow is what’s left each month after operating expenses and the loan payment, before income tax. When it’s negative, the page says how much you would add from other money and what rent would bring it to $0.
• Net operating income is the property’s income after operating expenses. Under it, the operating expense ratio shows those expenses as a share of rent collected: 48.65% in the example.
• DSCR is NOI divided by the year’s loan payments. At 1.00, NOI exactly covers them; the example’s 0.98 means NOI covers 98.3% of them. Lenders set their own minimums, and some use a different formula, so ask which one a quote uses.
• Break-even occupancy is the share of gross scheduled income you must collect for cash flow to reach $0. Maintenance and management shrink when less rent comes in, so it’s (fixed expenses + loan payments) ÷ (gross scheduled income × (1 − maintenance % − management %)). Above 100%, even a fully rented property loses money.
• Gross rent multiplier is the price divided by a year’s gross scheduled income, 8.12 in the example. The appraisal form for two- to four-unit properties multiplies monthly rent instead, which gives a number 12 times larger (97.4 here).
• The operating statement lists every line per month and per year, with a CSV download, and Where the gross income goes shows the same split as a bar.
• What if one number changes reruns everything at rents 5% and 10% either side of yours, at vacancy rates from 0% to 15%, at prices 5% and 10% either side, and at rates half a point and a point either side.

The 1% and 50% rules: quick screens, not answers

Two rules of thumb are used to sort listings before anyone builds a budget. The calculator shows both next to your line items:

• 1% rule: monthly rent should be at least 1% of the price. The example’s $1,695 ÷ $168,000 = 1.01%, so it passes.
• 50% rule: vacancy and operating expenses take about half of gross income. The example’s take 52.24%. At exactly half, NOI would be $10,350.00 and cash flow +$290.64 a year.

Both screens make the example look fine, yet its line items show −$173.54 a year. Neither rule knows the tax bill, the insurance quote, the loan or the age of the roof. Lenders apply their own haircut: when the rent from a purchased rental helps a borrower qualify for a loan sold to Fannie Mae, the lender counts 75% of the gross monthly rent and subtracts the full housing payment. The one-percentage button shows how a round figure can flatter: at 45% of rent collected the example makes $44.06 a month, against −$14.46 line by line, where expenses come to 48.65%.

Choosing vacancy, maintenance and reserve allowances

These allowances decide the answer more than any formula does, and they’re your estimates, not market data:

• Vacancy: the OCC describes a vacancy factor as an estimate of vacancy over the property’s life, chosen with comparable properties in the same market in mind, so it can sit above or below today’s rate. The Census Bureau publishes quarterly rental vacancy rates by state and for the 75 largest metro areas as a starting point. For a single house, allow for the weeks between tenants (one empty month a year is 8.33%) and for unpaid rent.
• Maintenance: a percentage of rent collected rises and falls with the rent, but an older house needs more than a newer one renting for the same amount. If you have the repair history, use it.
• Capital-expenditure reserve: price the roof, furnace, water heater and appliances by what each costs to replace and how many years it has left, and set aside each year’s share.
• Management: if you manage the property yourself, 0% is the honest cash figure, but part of the cash flow is then pay for your time. The self-managed button shows the example at $145.96 a month.

What this calculator leaves out

• Income tax and depreciation. Cash flow is before income tax. Under IRS Publication 527, a residential rental building is depreciated over 27.5 years and land isn’t depreciated at all, mortgage interest is deductible, and passive activity rules limit how rental losses can be used. How that nets out depends on your whole return.
• Appreciation and the sale. Price changes, selling costs and paying off the loan at sale aren’t modeled. For a multi-year view, put each year’s cash flow and the sale proceeds into an NPV and IRR calculator.
• Growth. Rent, taxes and costs stay at their year-one levels.
• Loan extras. There’s no mortgage insurance, points or lender fees. The payment is rounded to the nearest cent; a lender that rounds up may charge a cent more ($838.29 in the example).
• The result is an educational estimate from your own figures, not investment, tax or lending advice.

Common mistakes

• Taking maintenance and management as a share of scheduled rent. They’re paid on rent collected. In the example, 18% of $20,700.00 would be $3,726.00 instead of $3,465.18.
• Leaving out the reserve or management. Both are real costs even in a year you spend nothing on them. Without the $1,620.00 reserve and the $1,925.10 management fee, the example’s cap rate would read 7.99% instead of 5.88%.
• Counting the mortgage in NOI. Loan payments come after NOI; mixing them in blurs the property with its financing.
• Typing a yearly amount into a monthly box, or the reverse. Rent is per month, while tax and insurance start at a year. The calculator points out rent that looks like a year’s worth, and tax or insurance that looks like a month’s.
• Mixing up gross rent multipliers. A multiplier on monthly rent (97.4) and one on yearly income (8.12) describe the same price and rent.
• Counting principal paydown as cash flow. It builds equity but doesn’t pay this year’s bills.