How to use this investment property calculator
Enter the five numbers every deal starts with: the purchase price, your down payment / deposit, the interest rate, the loan term and the monthly rent. The results update as you type, and the hint under the rent field tells you how the property stacks up against the "1% rule".
- Open "More options" and fill in the running costs. Closing costs, vacancy, the management fee, maintenance, property tax, landlord insurance, HOA or strata fees and other monthly costs. These are where most rental spreadsheets go wrong, so the defaults give you a sensible starting point.
- Choose principal and interest or interest-only. Interest-only lowers the repayment but the loan balance never falls.
- Set your growth assumptions. Rent growth, appreciation (how fast the value rises), the holding period and selling costs drive the long-term figures: equity, total profit and annualized return.
- Read the insight line. It tells you the rent that would make the property break even, or how a 1-point rate change would move your cash flow.
The formulas behind rental property returns
NOI = rent collected − operating expensesCap rate = NOI ÷ purchase priceCash flow = NOI − loan repaymentsCash-on-cash = yearly cash flow ÷ total cash investedDSCR = NOI ÷ yearly loan repayments NOI = net operating income · rent collected = rent minus vacancy · operating expenses = management, maintenance, tax, insurance, HOA/strata and other costs, but not the loan
Net operating income is what the property earns before any borrowing. That is why cap rate uses it: it lets you compare two buildings regardless of how each buyer finances them. Cash flow and cash-on-cash return then bring your loan into the picture. DSCR, the debt service coverage ratio, shows how comfortably the property's income covers its loan.
For the long-term view we project each year separately. Rent and fixed costs rise by your rent growth rate, the property value rises by your appreciation rate, and maintenance is budgeted as a share of that rising value. In the final year we assume you sell, pay the selling costs and repay the loan. The annualized return is the internal rate of return (IRR) on all of those cash flows.
Worked example
You buy a $350,000 rental with 25% down ($87,500) and borrow $262,500 at 7% over 30 years. The principal and interest repayment is $1,746.42 a month, or $20,957 a year.
Rent of $3,000 a month is $36,000 a year. Allowing 5% for vacancy leaves $34,200 collected. Running costs are an 8% management fee ($2,736), 1% of the value for maintenance ($3,500), $4,200 of property tax and $1,600 of insurance: $12,036 in total. That leaves a net operating income of $22,164, a cap rate of 6.33%.
After loan repayments you keep $1,207 a year, about $101 a month. With $10,500 of closing costs your total cash invested is $98,000, so the cash-on-cash return is 1.2% and the DSCR is 1.06. Gross yield is 10.3% and net yield 6.1%.
Hold it for 10 years with rent, costs and value all rising 3% a year and the property is worth $470,371 against a loan of $225,258: equity of $245,113. Cash flow adds up to $44,515 over the decade. Selling, paying 6% in costs and clearing the loan returns $216,891, for a total profit of $163,406 and an annualized return of 11.1%.
Notice how thin the year-one margin is. Rent only has to fall to $2,885 a month for the property to stop paying for itself, and if the rate were 8% instead of 7% you would be about $79 a month out of pocket. A rate of 6% would lift cash flow to $273 a month.
Cash flow or growth: what really drives the return
In the example, year-one cash flow is small, yet the 10-year return is strong. Most of the profit comes from two sources that do not show up in your bank account until you sell: appreciation and the tenant gradually paying down your loan. That is normal for leveraged property, but it changes the risk.
Set appreciation to 0% and the same deal's equity after 10 years falls to $124,742 and the annualized return drops to 5.2%, with a total profit of $55,381. Cash flow is the part of the return you can count on, so many investors want a property that at least breaks even on rent and treat growth as the bonus. Compare any purchase against simply investing the same cash, using the rent vs buy calculator for your own home or the compound interest calculator for a portfolio.
| Measure | What it tells you | Common rule of thumb |
|---|---|---|
| 1% rule | Quick screen: is the rent high for the price? | Monthly rent at least 1% of price |
| Cap rate | Return of the property with no loan | Compare with similar properties and your loan rate |
| Cash-on-cash | Yearly cash return on the money you put in | Positive, and ideally above what cash savings earn |
| DSCR | How safely the rent covers the loan | Lenders often look for 1.2 or more |
| IRR | Overall yearly return, including the sale | Compare with other investments of similar risk |
US and Australian ways of looking at a rental
US investors usually talk about cap rate, cash-on-cash return and DSCR, and screen deals with the 1% rule. Lenders for investment properties commonly ask for a larger down payment than for a home you live in, and some "DSCR loans" are approved mainly on the property's rent rather than your salary.
Australian investors more often quote rental yield, gross and net, and talk about gearing. A property is positively geared when the rent covers all costs including interest, and negatively geared when it doesn't and the owner tops up the difference, hoping capital growth makes up for it. Tax rules decide how attractive that is, and they differ by country and change over time, so get advice from a registered tax adviser before you rely on any tax benefit. Our figures are all before tax.
Interest-only loans are also common in Australia. Switch the toggle on in the example and cash flow rises to $316 a month and the DSCR to 1.21, but after 10 years you still owe the full $262,500, so equity is $207,871 instead of $245,113. If you want a pure yield comparison, the rental yield calculator works it out from weekly or monthly rent.
Common mistakes when analyzing a rental property
- Leaving out vacancy and maintenance. No property is let 52 weeks a year forever, and roofs, hot water systems and appliances all wear out. Budget for both even if the property is new.
- Forgetting the costs of buying and selling. In the example, 6% selling costs on a $470,371 sale come to more than $28,000. They are why short holding periods often lose money: try a 1-year hold and the annualized return turns negative.
- Assuming your rate never changes. If your loan is variable or the fixed period is short, re-run the numbers 1 or 2 points higher. The mortgage calculator shows the repayment at any rate.
- Over-borrowing. A bigger loan raises cash-on-cash return when things go well and deepens losses when they don't. The LTV calculator shows how much equity cushion you have.
Tip: before you make an offer, find the break-even rent in the insight line and ask yourself whether the property could still rent for that in a weak market. If the answer is no, you are relying on growth to make the deal work.
Frequently asked questions
What is a good cap rate for a rental property?
What is the difference between cap rate and cash-on-cash return?
What is DSCR and why do lenders care about it?
What is the 1% rule in real estate?
What does negatively geared mean?
How is the annualized return (IRR) worked out?
Does this include tax, depreciation or loan fees?
This calculator gives estimates for education and planning. It is not financial advice, and your lender's figures may differ. See how we calculate.