The four numbers that judge a rental
Real estate investors don't buy on gut feel — they run the numbers. Four metrics do most of the work, and this calculator computes them all:
- Net Operating Income (NOI): annual rent minus operating expenses (taxes, insurance, maintenance, management, vacancy allowance) — but before the mortgage. It measures the property's own earning power.
- Cap rate: NOI ÷ purchase price. It's the unleveraged yield — what the property returns if you paid all cash. Lets you compare deals regardless of financing.
- Cash flow: what's left each month after the mortgage. Positive is the goal; negative means the property costs you money every month.
- Cash-on-cash return: annual cash flow ÷ cash actually invested (your down payment). It measures the return on your money, accounting for leverage.
Reading the results
Cap rates vary by market — 4–5% in expensive coastal cities, 7–10%+ in higher-yield areas (usually with more risk or slower growth). Cash-on-cash return shows leverage at work: borrowing can amplify your return on invested cash, but it also amplifies losses and turns cash flow negative if rents dip or rates are high. A great deal typically shows a healthy cap rate and positive cash flow with a solid cash-on-cash return.
Don't forget the expenses beginners miss
The fastest way to fool yourself is to understate expenses. Rookies count taxes and insurance but forget maintenance, capital expenditures (roof, HVAC), property management, and vacancy. A common rule of thumb reserves ~50% of rent for operating expenses (excluding mortgage) over the long run. If a deal only works when you assume zero vacancy and no repairs, it doesn't work.
Quick screens and deeper analysis
The "1% rule" (monthly rent ≥ 1% of price) is a fast first-pass screen, not a guarantee — it's gotten hard to meet in many markets. Use it to filter, then run the full numbers here. And remember this tool covers the income side; total return also includes appreciation, loan paydown (your tenants building your equity), and tax benefits — real estate's returns come from several sources at once, which is both its appeal and its complexity.