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Rental Property Calculator

Buying a rental with down at , renting it for a month with a month in taxes, insurance and upkeep, and selling after years earns $83.07 a month in cash flow and returns 11.1% a year.

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Is this rental property a good investment?

A rental pays you in two ways: monthly cash flow, and the profit when you sell. Enter the price, your down payment, the mortgage rate, the rent, monthly expenses and how long you'll hold it. The example buys a $300,000 rental with 25% down at 7%, rents it for $2,400 a month with $700 a month in taxes, insurance and upkeep, and sells after 10 years. It makes $83 a month in cash flow at first and a yearly return of about 11.1%.

Cash flow is what's left each month. We take the rent, subtract 5% for vacancy, then take off your expenses and the loan payment. Here, $2,400 less 5% is $2,280. Less $700 in expenses and a $1,497 loan payment, that leaves $83. Rents and costs rise 3% a year, so cash flow usually grows. Because you put in $84,000, including closing costs, that first year's cash flow is a 1.19% cash-on-cash return.

The sale often matters more. The property grows 3% a year in value, and every payment cuts the loan. After 10 years and 6% selling costs, the sale leaves about $185,907 after paying off the loan. Add $37,723 in cash flow and subtract the $84,000 you put in, and the total profit is about $139,630. The IRR turns that into a yearly rate, so you can compare it with other investments.

Watch the assumptions. With no appreciation, the same deal returns about 4.7% a year. At $2,600 rent, it returns about 13.3% and makes $273 a month at first. Leverage cuts both ways: borrowing raises your return when the property earns more than the loan costs, and lowers it when it doesn't. Choose "Edit them" to change vacancy, appreciation, rent growth and transaction costs.

Frequently Asked Questions

What is a good cap rate for a rental property?

Many investors look for 5% to 10%, but it depends on the area and the risk. The cap rate is a year's rent, after vacancy and expenses but before the loan, divided by the price. Our example has a cap rate of 6.32%. Expensive cities tend to have lower cap rates and more appreciation. Cheaper areas often have higher cap rates with more risk.

What is a good cash-on-cash return?

Investors often aim for 8% to 12%, but with today's mortgage rates many deals start lower. Cash-on-cash return is a year's cash flow divided by the cash you put in. Our example starts at 1.19%. With 40% down, it rises to 3.56%, because the loan payment is smaller. It leaves out appreciation and loan paydown, which IRR includes.

What is the 1% rule in real estate?

It says the monthly rent should be at least 1% of the price. A $300,000 home would need $3,000 a month. Few homes meet it in today's market. It's a quick screen for cash flow, not a full analysis. A deal can fail the 1% rule and still make sense if you expect strong appreciation, or pass it and still lose money on repairs.

What is the 50% rule for rental properties?

It estimates that operating expenses, not counting the mortgage, will eat about half the rent over time. That includes taxes, insurance, repairs, vacancy, management and capital costs such as a new roof. Our example uses $700 a month plus 5% vacancy, about 34% of rent. If you're unsure, try the 50% rule's figure in the expenses field.

What is IRR in real estate?

IRR, the internal rate of return, is the yearly rate that makes all your cash flows worth zero today: the cash you put in, each year's cash flow and the sale proceeds. It accounts for timing, so money received sooner counts for more. Our example has an IRR of about 11.1% over 10 years. Use it to compare a rental with stocks or other deals.

What expenses should I include?

Include property tax, insurance, repairs and maintenance, property management (often 8% to 10% of rent), HOA fees, utilities you pay, and a reserve for big items like roofs and appliances. Leave out the mortgage, because the calculator adds it. Vacancy is entered separately. Underestimating expenses is one of the most common mistakes with rentals.

How much should I put down on a rental property?

Investment property loans usually need 15% to 25% down, with higher rates than a home you live in. A bigger down payment raises your monthly cash flow but can lower your yearly return. In our example, 40% down raises cash flow to $382 a month but lowers the IRR from 11.1% to 10.0%. Paying all cash makes $1,580 a month with an IRR of 8.4%.

Does a rental property have to cash flow?

Not always, but negative cash flow means you pay to hold it every month, and you rely on appreciation and loan paydown for your return. That's riskier: if prices stall or you need to sell in a downturn, you may lose money. Most investors want at least a small positive cash flow plus a reserve for repairs and vacancies.

How are rental properties taxed?

Rental income is taxable, but you can deduct expenses, mortgage interest and depreciation, which can reduce or wipe out taxable income on paper. When you sell, gains are generally taxed, and depreciation you took may be taxed at a different rate. A 1031 exchange can defer taxes when you buy another property. Ask a tax professional about your situation.

How long should I hold a rental property?

Longer holds usually help, because buying and selling costs are spread over more years. In our example, selling after 5 years returns about 8.7% a year. Holding 10 years raises that to about 11.1%. Change the years above to see your own result, and remember that you also take on the work and risk of being a landlord.

Should I rent out my home instead of selling it?

Run both. Enter your home's value, what you owe as the down payment (your equity as a percentage), your current rate and a realistic rent. If the cash flow is positive and the return beats what you'd earn elsewhere, renting may make sense. Our rent vs. buy calculator helps with the other side of the move.

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