RightFiguresTwo rates from the same rent
Annual gross scheduled rent is 12 × monthly gross rent. Effective rental income reduces that gross by the vacancy percent you enter and rounds half up to the nearest cent. Net operating income is effective income minus annual operating expenses. The cap rate is:
cap rate = NOI ÷ purchase price × 100
Cash flow after debt service is NOI minus the annual loan payment you enter. Initial cash invested is the down payment plus initial closing costs plus initial renovation costs. Cash-on-cash return is:
cash-on-cash return = cash flow ÷ cash invested × 100
Both percents round half up, away from zero at an exact half, to six decimal places. A negative NOI or cash flow stays negative. That is a result, not an error.
Operating expenses
Include the property taxes, insurance, repairs, maintenance and property management you want counted in NOI. Exclude the loan payment: it has its own field. Also exclude depreciation, income taxes, capital projects, the cost of selling later, and any appreciation you hope for. IRS Publication 527 discusses rental income and expenses for tax reporting. This calculator is not a depreciation worksheet and does not estimate a tax benefit.
Closing costs and renovations are cash
The closing costs and renovation costs are money you pay in cash at the start. They are not added to a mortgage, and this calculator does not invent a loan to cover them. A down payment may be any amount from $0.00 through the purchase price. Closing costs and renovations may be larger than the price because they are extra cash, not part of the price.
If the down payment, closing costs and renovation costs are all $0.00, cash-on-cash return is undefined and the calculation is rejected. Use the cap rate calculator for an unlevered rate when no cash is invested.
The annual loan payment is the principal and interest, or interest only, that you type. Principal inside that payment is not subtracted a second time. A cash purchase can still have a payment if you enter one. The payment is not checked against the unpaid price.
Worked example
A $300,000.00 purchase, $60,000.00 down, $6,000.00 cash closing costs, $4,000.00 cash renovation, $2,000.00 monthly rent, 5% vacancy and $6,000.00 operating expenses:
- Annual gross scheduled rent: $24,000.00
- Effective rental income: $22,800.00
- NOI: $16,800.00
- Cap rate: 5.6%
- Cash invested: $70,000.00
With $12,000.00 of annual debt service, cash flow is $4,800.00 and cash-on-cash return is 6.857143%. With $20,000.00 of debt service, cash flow is −$3,200.00 and cash-on-cash return is −4.571429%. With no debt service, cash flow stays $16,800.00 and cash-on-cash return is 24%.
A $100.00 property, $1.00 down, no closing or renovation, $10.01 monthly rent, 33.333333% vacancy and no expenses or debt service has $80.08 of NOI, an 80.08% cap rate and an 8008% cash-on-cash return. The $1.00 denominator is allowed. A $0.00 investment is not.
What this is not
Cap rate ignores financing. Cash-on-cash return ignores appreciation and taxes. Neither rate is an appraised value. The California Board of Equalization describes the income approach, including NOI and capitalization, in Lesson 8. A loan payment itself belongs on the mortgage calculator.
Sources & review
- Lesson 8: Income Approach to Value — California State Board of Equalization
- Publication 527, Residential Rental Property — Internal Revenue Service
Last reviewed: . The formula is reproduced above so you can check the math independently.
Educational estimate only. An appraisal, a loan and a tax return answer different questions.