Rental Property ROI Calculator

A good cap rate depends on the market and property type. Generally, 5-7% is considered average, 8-10% is good, and above 10% is excellent. However, higher cap rates often come with higher risk. In competitive markets like San Francisco or New York, cap rates of 3-5% are common.

Cash-on-cash return measures the annual return on your actual cash invested. It's calculated as: Annual Cash Flow / Total Cash Invested. For example, if you invest $50,000 and receive $5,000 in annual cash flow, your cash-on-cash return is 10%. This metric is crucial because it shows your actual return on the money you put into the deal, accounting for leverage.

The 1% rule is a quick screening tool that suggests a rental property should generate monthly rent of at least 1% of the purchase price. For example, a $200,000 property should rent for at least $2,000/month. While not a strict requirement, properties meeting this rule often have positive cash flow. Some investors use a 2% rule for better cash flow.

DSCR (Debt Service Coverage Ratio) is calculated as NOI / Annual Debt Service. It shows how well the property's income covers its debt payments. Lenders typically require a DSCR of 1.2 or higher, meaning the property generates 20% more income than needed to cover the loan payments. A higher DSCR provides a safety margin.

BRRRR stands for Buy, Rehab, Rent, Refinance, Repeat. It's an investment strategy where you: 1) Buy a distressed property below market value, 2) Rehabilitate it to increase value, 3) Rent it out, 4) Refinance based on the new higher value, and 5) Repeat with the cash pulled out. When done correctly, you can recover most or all of your initial investment.

NOI = Gross Rental Income - Operating Expenses. Operating expenses include property taxes, insurance, maintenance, property management, vacancy allowance, and reserves for capital expenditures. NOI does NOT include mortgage payments, depreciation, or income taxes. It represents the property's profitability before financing costs.

Include: Property taxes, insurance, maintenance (5-10% of rent), capital expenditure reserves (5-10%), vacancy allowance (5-10%), property management (8-12% if not self-managing), HOA fees, utilities (if landlord-paid), and lawn/snow services. The 50% rule suggests total operating expenses are roughly 50% of gross rent.

Depreciation is a non-cash tax deduction that reduces your taxable income. Residential rental properties are depreciated over 27.5 years. For a $275,000 building (excluding land value), you can deduct $10,000 annually from your taxable rental income. This can significantly reduce your tax liability, and the deduction remains even while the property appreciates in value.

Property managers typically charge 8-12% of rent. Self-management saves this cost but requires your time. Consider using a manager if: you have multiple properties, live far from the property, don't want to handle tenant issues, or value your time highly. Many investors self-manage nearby properties initially, then transition to professional management as they scale.

Most investors assume 5-10% vacancy. In strong rental markets with high demand, 5% may be appropriate. In markets with more competition or for properties that may be harder to rent, use 8-10%. Also consider credit loss (1-2%) for tenants who don't pay. It's better to overestimate vacancy than be caught short on cash flow.