Rental Property Calculator
Investment Results
Cash Flow Analysis
Capitalization Rate
Rental Yield Results
Rental Property Investment Guide
Investing in rental properties can be a lucrative way to build wealth, but it requires careful analysis and planning. Our rental property calculator helps you evaluate four key metrics that real estate investors use to assess potential investments.
1. Return on Investment (ROI)
ROI measures how much money you make on an investment relative to its cost. It's the most comprehensive metric for evaluating rental property performance.
Practical Example: Evaluating a Rental Property
For a $250,000 property with $20,000 in repairs/closing costs:
Total Investment = $270,000
If annual net income after expenses is $18,000:
ROI = (18,000 / 270,000) × 100 = 6.67%
2. Cash Flow Analysis
Cash flow is the lifeblood of rental property investing. Positive cash flow means the property generates more income than expenses each month.
Practical Example: Monthly Cash Flow
Monthly income: $2,100 ($2,000 rent + $100 other)
Monthly expenses: $1,750 ($1,200 mortgage + $200 tax + $100 insurance + $150 utilities + $100 maintenance)
Cash Flow = $2,100 - $1,750 = $350/month
This property generates $4,200 annual positive cash flow
3. Capitalization Rate (Cap Rate)
Cap rate measures a property's potential return without financing. It's useful for comparing properties regardless of financing method.
Practical Example: Comparing Properties
Property A: $300,000 value with $24,000 NOI
Cap Rate = (24,000 / 300,000) × 100 = 8%
Property B: $400,000 value with $30,000 NOI
Cap Rate = (30,000 / 400,000) × 100 = 7.5%
Property A has a better cap rate despite lower absolute returns
4. Rental Yield
Rental yield measures the annual return generated by a property based on its rental income.
Practical Example: Yield Comparison
$300,000 property renting for $24,000 annually with $8,000 expenses:
Gross Yield = (24,000 / 300,000) × 100 = 8%
Net Yield = ((24,000 - 8,000) / 300,000) × 100 = 5.33%
The net yield provides a more accurate picture of returns
Key Considerations for Rental Properties
Vacancy Rates
Always factor in vacancy rates (typically 5-10%) when calculating potential income. Even the best properties experience vacancies between tenants.
Maintenance Costs
Rule of thumb: Budget 1-2% of property value annually for maintenance. Older properties may require more.
Property Management
If using a property manager, factor in 8-12% of monthly rent as a management fee.
Unexpected Expenses
Maintain a cash reserve (3-6 months of expenses) for emergencies like major repairs or extended vacancies.
Common Rental Property Mistakes to Avoid
- Underestimating expenses: Many new investors fail to account for all costs (maintenance, vacancies, repairs, etc.)
- Overestimating rent: Research comparable rents carefully to avoid unrealistic income projections
- Ignoring location: Good locations attract better tenants and appreciate more over time
- Over-leveraging: Taking on too much debt leaves you vulnerable to market downturns
- Poor tenant screening: Bad tenants can cost thousands in damages and lost rent
Tax Benefits of Rental Properties
Rental properties offer several tax advantages that can improve your returns:
- Depreciation: Deduct a portion of the property value each year (27.5 years for residential)
- Mortgage interest: Deduct interest paid on your rental property loans
- Operating expenses: Deduct all reasonable expenses related to the property
- Capital gains treatment: When selling, profits may qualify for lower capital gains rates
- 1031 exchanges: Defer capital gains by reinvesting proceeds in another property
Frequently Asked Questions
Q: What's a good ROI for rental properties?
A: Most investors aim for at least 8-12% ROI. However, this varies by market. In high-appreciation areas, lower cash flow may be acceptable.
Q: How much cash flow should a rental property generate?
A: A good rule is $100-200 per door in monthly cash flow after all expenses. In expensive markets, this may be difficult to achieve.
Q: What's a good cap rate for rental properties?
A: Generally, 5-10% is considered good. Lower in expensive coastal markets (4-6%), higher in Midwest/South (8-10%).
Q: Should I pay cash or finance a rental property?
A: Financing (with 20-25% down) typically provides better returns due to leverage, but cash purchases eliminate mortgage risk.