How to assess a rental property
A rental has three separate money stories: what the building earns, what the financing costs, and what you receive when you sell. This calculator keeps them apart. Enter the purchase price, whether you borrow, the cash you pay at closing and any initial repairs. Then enter rent, vacancy, running costs and a holding period. The starting numbers are hypothetical, a 200,000 property with 20% down and a 6% 30-year loan, so you can see a full answer immediately and then replace every figure with your own.
Work through the page in the order the results are shown. First check that the income and expense lines are realistic, because every later figure depends on them. Then read the year-one reconciliation, which ties income to cash flow line by line, and only after that look at the annual table, the growth chart and the sale. Changing one input at a time, rather than several at once, makes it clear which assumption is doing the work.
Rental income, vacancy and operating expenses
Income starts with monthly rent and any other recurring income, multiplied by twelve. Vacancy removes a share of both, leaving effective income, the money you actually collect. With 2,000 of monthly rent and 5% vacancy, year-one effective income is 22,800. A management fee, if you pay one, is a percentage of that collected amount, not of the rent you hoped for.
Operating expenses are the costs of keeping the property rented: property tax, insurance, HOA fees, maintenance and other costs. The example uses 3,000, 1,200, 0, 2,000 and 500, a total of 6,700 in year one. Each line, and the rent, grows at its own annual rate, 3% in the example, so year two is not simply year one repeated. Growth is applied from the second year on. Entering costs separately lets you test one item, such as a tax reassessment, without disturbing the others.
Rent is the number most people research, but it is rarely the number that surprises them. Taxes and insurance can be reassessed, repairs arrive unevenly, and an empty month costs a full month of rent plus the expenses that continue regardless. Use quotes, tax bills and past statements where you can, and treat round numbers with suspicion. If you do not know a figure, enter a cautious one and see how much the answer changes: a result that only works with optimistic inputs is not a robust result.
Management is another place where owners differ. Some self-manage and count their time as free, while others pay a percentage of collected rent. The calculator lets you enter the fee either way, so you can compare the property with and without it. Remember that a fee removed from the model does not make the work disappear; someone still has to do it.
NOI and cap rate
Net operating income is effective income minus management and operating expenses: 22,800 − 6,700 = 16,100. The capitalization rate divides year-one NOI by the purchase price, so 16,100 ÷ 200,000 = 8.05%. This page calls it the purchase-price cap rate to make the denominator explicit. When repairs raise the value, a second figure divides by the value after repairs. In the repair example below, NOI divided by 260,000 is 6.19%, against 8.05% on the purchase price.
What stays outside NOI
Mortgage payments, principal and interest alike, are not operating expenses, so NOI is the same whether you pay cash or borrow. The capital reserve is also kept out of NOI. It is cash you set aside for a roof or a boiler, and it reduces cash flow instead. Income tax and depreciation are not modelled at all. This keeps NOI a clean measure of the property itself, comparable across financing choices.
A cap rate is a quick screen, not a verdict. Two properties with the same cap rate can differ greatly in condition, tenant quality and local growth, and a very high figure often signals higher risk rather than a bargain. Use the number to rank candidates for closer study, and compare it with the interest rate you would pay on a loan, since borrowing at a rate above the cap rate means leverage works against you unless rents and values grow.
Financing and cash-on-cash return
Cash invested at the start is the down payment plus closing cash plus any repair cost: 40,000 + 6,000 = 46,000 in the example. The 160,000 loan at 6% over 30 years has a payment of 959.28, so twelve payments total 11,511.37 in year one. Cash flow is NOI − reserve − debt service = 16,100.00 − 0.00 − 11,511.37 = 4,588.63.
Cash-on-cash return divides that cash flow by the cash you invested: 4,588.63 ÷ 46,000 = 9.98%. It differs from the cap rate because it looks after debt service and uses your cash, not the price. Paying all cash in the example removes the loan and raises cash invested to 206,000, so first-year cash flow is 16,100 and cash-on-cash is 7.82%, a little below the 8.05% cap rate because closing cash is added to the denominator.
Watch the labels. The table reports an annual cash-on-cash figure for every year. The total profit tile is a lifetime number: it adds all cash flows and the sale, then divides by cash invested. In the example that is 402,304 on 46,000, or 874.57% over 20 years. It is not an annual return, and putting it beside a one-year figure would mislead.
Financing changes who bears the risk as well as the return. With a loan, a smaller amount of your own cash controls the whole property, so gains and losses are both magnified, and the payment is due whether or not the unit is let. Lenders also treat rental purchases differently from a home you live in, often asking for a larger down payment and a higher rate, so use quotes that match the property type. The mortgage calculator and amortization schedule linked below show the loan in more detail.
Sale proceeds, equity and IRR
Sale value comes from a yearly growth rate or from a price you enter for the final year. At 3% a year the 200,000 property is worth 361,222 after 20 years. Selling costs of 8% remove 28,898, and the loan still owes 86,406, leaving net sale proceeds of 245,919. If the debt is larger than the sale price after costs, the proceeds turn negative and are shown as cash you would need to bring, not rounded up to zero. With a known final price of 400,000 instead, net proceeds are 281,594.
The IRR treats the investment as a series of year-end cash flows: the cash you invest, each year's cash flow, and the sale proceeds added to the last year. It finds the single yearly rate that makes their present value zero. For the example it is 18.42%. It is a return on your invested cash that includes leverage, so it is not comparable with the cap rate. Some patterns have no sensible single answer. A series such as −100, +230, −132 changes sign twice, so more than one rate fits and the page withholds the figure instead of choosing a flattering one. For that series the check says: more than one rate could fit.
Remember that a sale is a single event at the end of a long series of assumptions. The further out the sale year, the more the result depends on growth rates that nobody can know, so check how the answer changes if the property grows more slowly or sells for the same price you paid. If the investment only works with strong appreciation, that is worth knowing before you commit.
Vacancy and repair sensitivity
Vacancy is the assumption that moves a rental the most for the least obvious reason. Doubling the example vacancy from 5% to 10% cuts year-one effective income to 21,600 and cash flow from 4,589 to 3,389, and the IRR to 16.52%. Adding 1,000 of yearly maintenance on top lowers year-one cash flow to 2,389. The Vacancy compare tab runs this for your numbers with the same financing and sale assumptions.
Repairs behave differently from a reserve. A reserve is money you set aside to spend later; an initial repair is cash you spend now. In the example, 20,000 of repairs with a 260,000 value afterwards raises cash invested to 66,000 while value starts at 260,000. The repair spending is not counted as appreciation, and the higher value is only as good as your estimate. There is no universal percentage for either vacancy or maintenance. Local rent history, the age of the property and the condition of its systems matter more than a rule of thumb.
Use the Vacancy compare tab to build a short list of cases: a cautious case, your central case and an optimistic one. Look for the point where cash flow turns negative, because that tells you how much of a cushion you need in savings. A property that needs cash from your pocket every month in a bad year is a different commitment from one that stays positive.
Limits, landlord responsibilities and alternatives
A model cannot see a leaking roof, a long vacancy or a tenant dispute. Landlords carry legal duties, insurance needs and time costs that this calculator does not price, and rents and values can fall as well as rise. The results are not a promise of passive income or a recommendation to buy. Income tax, depreciation, capital-gains tax, rent comparables and the value of your own time are all outside the model. Use it to compare scenarios on the same footing, then check the numbers with a tax adviser and a local lender. To estimate the acquisition loan, use the mortgage calculator; to see how much of each payment is interest, inspect the debt schedule; and to compare returns after inflation, compare nominal and inflation-adjusted returns. If you are weighing a home for yourself rather than an investment, compare a personal housing decision. Rental financing differs from owner-occupied financing, so do not assume the same rates or down payment apply.
Rental property questions
Is mortgage principal an operating expense?
No. NOI excludes debt service; cash flow subtracts the full debt payment.
Is cash-on-cash the same as cap rate?
No. Cash-on-cash relates cash flow after debt service to invested cash; cap rate relates NOI to price.
Do repairs automatically increase value?
No. Repair cost and after-repair value are separate assumptions.
Does vacancy apply to other income?
In this model it applies to both rent and other recurring income. Use an appropriate combined assumption.
Why can IRR be unavailable?
Some cash-flow patterns have no finite solution or multiple possible rates. A single selected rate would be misleading.
Are taxes included?
Entered property taxes are expenses. Income tax, depreciation and tax on sale are not calculated.