Rental Property Calculator
Forget the guesswork. Use our rental property ROI calculator to KNOW a property’s returns!
Thinking about buying a new rental property? Or just want to check up how your existing rental unit is performing?
We put together this nifty rental property calculator to help you measure success. As the old saying in business goes, that which gets measured, gets done. If you want strong ROI, you need to keep your eyes on the prize!
Our rental income calculator accounts for both your up-front investment (down payment, closing costs, initial renovations) and your ongoing costs. And not just obvious costs like taxes and insurance, but the nagging expenses that will pop up in the real world: vacancy rates, ongoing maintenance and repairs, property management fees.
Start playing around with it! Enter numbers and see what happens. But we recommend keeping in a vacancy rate of at least 7% and significant annual repair/maintenance expenses. Most landlords ignore CapEx at their own peril.
We also recommend including property management expenses, even if you’re managing the rental unit yourself – your time has value, too!
How Are We Calculating ROI?
Investors calculate return on investment (ROI for short) in different ways, but for rental properties, the three most important measures of returns are cash flow, annual yield, and cap rates.
We don’t need to explain cash flow to you, but annual yield is one of those terms that accountants throw around that most of us just nod sagely at and pretend we know what they’re talking about.
Annual yield in this case is your cash-on-cash return: a property’s annual profits divided by your up-front cash investment. In other words, if you’re $20,000 out-of-pocket, how much of that “returns” to you in the form of profits every year?
For example, if you had $2,000 in annual profits from a $20,000 initial cash investment, that would be a 10% return on investment.
We do not include possible but unknowable variables, such as appreciation. Your rental property might appreciate… or it might not. Think of appreciation as a possible bonus.
Does this Rental Property Calculator Also Calculate Cap Rates?
We have an entire article devoted to cap rates (which you should read if you don’t fully understand them), but here’s the quick version for the purposes of this rental property calculator.
Cap rates measure the expected return on a rental property, without factoring in financing. Specifically, it’s a ratio of the property’s annual income over its acquisition costs.
Here’s the formula:
NOI – net operating income – includes expenses such as property taxes, insurance, repairs and maintenance, property management costs, and vacancy rate.
As mentioned above, it does not include any financing-related costs (e.g. mortgage interest).
You’ll see “Cap Rate” listed as one of the ROI fields in the rental property calculator above.
Remember, cash-on-cash return is based on how much cash you’re putting up yourself (so your financing does impact this number). Cap rates are solely based on a property’s price, rent, and expenses.
Why Do Cap Rates & Cash-on-Cash Return Matter?
On the simplest level, these measures of a property’s returns help you compare potential investments.
Say you’re looking at two properties across the street from each other. They’re mirror images of one another, identical in every way.
If everything else were equal (which, granted, it never is in the real world), you would want to buy the one with the higher cap rate. Higher cap rates indicate more income for less cost.
Cash-on-cash returns are useful for comparing your returns on a rental property to, well, any other type of investment. To keep this example just oversimplified as the previous example, imagine you have $20,000 to invest somewhere. You’ve narrowed your options to a mutual fund, and a turnkey rental property ($20,000 covers your down payment and closing costs).
Say the mutual fund will pay you a generous 5% annual dividend, and the rental property would deliver a cash-on-cash return of 7%. We’ll ignore potential appreciation of either asset to keep this example simple.
In that case, the rental property would deliver the better return on your $20,000, at least as far as income – annual yield – goes. Again, in the real world, one asset might appreciate faster than the other, or maybe you don’t want to use leverage, or maybe you prefer the liquidity of the mutual fund, or whatever.
But ultimately the purpose of calculating these rental property returns is to help you compare investments, to make the best choice possible.
What’s a Good ROI for a Rental Property?
There is no one right answer for this question, but we’re going to provide an answer anyway, because we don’t waffle or dissemble. In most cases, a rental ROI of under 5% is not worth pursuing (there would have to be other reasons to buy it besides ROI). You might as well invest in your retirement account instead, and save yourself the hassle.
Returns between 5-10% are reasonable for rental properties, if you’ve included some conservative cushions for annual repairs, vacancy rate, etc. An ROI of over 10% is a good deal, assuming you’ve used accurate and conservative numbers in your calculation.
At a bare minimum, your cash flow should be over $100/month. Sure, there are exceptions, but we’d be here all day if we had to notate every exception.
Lower-end properties tend to look better on paper than mid- and higher-end properties, but don’t be fooled. Estimate higher vacancy rates and higher repair costs for lower-end properties. You’ll have more frequent turnovers, which means more repair expenses in painting, new carpets, repaired damage caused by tenants, and so on.
When considering a new potential rental investment property, use estimated numbers in the calculator above. If it initially looks promising, dig deeper and find real-world, accurate numbers for that property as best you can, and plug in the better numbers to see if the ROI holds up.