Rental Property ROI & Cap Rate Calculator

Real estate investment analysis requires understanding multiple return metrics. Cap rate, cash-on-cash return, and NOI each tell different parts of the story. Sophisticated investors use all three to evaluate opportunities and compare properties across markets.

Understanding Cap Rate

Capitalization rate (Cap Rate = NOI / Purchase Price) measures property return independent of financing. It enables apples-to-apples comparison across properties regardless of loan terms. Higher cap rates indicate higher returns but often come with higher risk—tertiary markets and value-add properties typically trade at higher caps than stabilized Class A assets.

Cash-on-Cash Return

Cash-on-cash (Annual Cash Flow / Cash Invested) measures return on your actual dollars invested. Unlike cap rate, it accounts for financing leverage. A 6% cap rate property with 75% LTV financing might deliver 12-15% cash-on-cash returns when leveraged appropriately.

The 1% Rule

A quick screening tool: monthly rent should equal at least 1% of purchase price. A $300,000 property should rent for $3,000+ monthly. Properties meeting this threshold typically cash flow positively with standard 20-25% down financing.

Debt Service Coverage Ratio

DSCR (NOI / Annual Debt Service) measures how easily a property can cover mortgage payments. Lenders typically require 1.20-1.25 DSCR minimum. Higher ratios provide more cushion for vacancy or unexpected expenses.

Building in Realistic Reserves

Successful investors budget conservatively: 5-10% vacancy even in hot markets, 8-10% property management even if self-managing (values your time), and 10-15% maintenance reserves for capital expenditures. Properties that only work with optimistic assumptions often disappoint.