Rental Property Calculator

Cost of Investment

1. Purchase Price
This is the total amount paid to buy the rental property. It includes the sale price but not extra fees like closing costs or commissions.

2. Down Payment
The down payment is the portion of the purchase price the buyer pays up front. It’s usually expressed as a percentage of the purchase price. A higher down payment means you “borrow” less from a lender, which can lower monthly loan payments.

Real estate investors typically pay 20-25% of the purchase price up front, but some may pay as little as 15%.

3. Financed Amount
The financed amount is the part of the purchase price borrowed from the lender after deducting the down payment, also known as the principal balance.

Financed amount = (purchase price – down payment).

This amount will accrue interest based on the interest rate and the loan term.

4. Interest Rate
The interest rate is what the lender charges on the financed amount. A lower interest rate can reduce the overall cost of financing the property. For this calculation, we assume an interest rate of 8%.

5. Loan Term
This is how long the mortgage loan will be repaid. Common terms are 15, 20, or 30 years. The term length affects monthly payments and total interest paid over the life of the loan.

6. Closing Costs
These are all the fees and expenses charged at the end of a real estate deal. They can include loan fees, appraisal fees, title insurance, and taxes. Usually, these costs range from 2% to 5% of the property's purchase price.

7. Renovation Costs
These are costs for fixing, updating, or remodeling the property to make it rentable. They can include structural repairs, painting, flooring, plumbing, and electrical work.

Many investors suggest keeping repair budgets between 5-10% of the total property value, but the actual cost depends on the property's condition.

Income

Rent
Rent is the monthly payment that renters make to the landlord to live in the rental property. It is the main source of income for investors. The rent amount is usually outlined in the lease agreement and can be more or less based on the property's location, size, condition, and amenities.

Setting the right rent price helps cover monthly expenses and ensures you’re making more than you’re spending. Investors should research market trends to set competitive rent prices and compare their rental to similar properties in the area.

Recurring Expenses

Monthly expenses are the regular costs needed to manage and maintain the property.

1. Property Management Cost
This is the monthly payment to a property manager or company that handles daily operations like tenant screening, rent collection, maintenance, and tenant issues. These fees usually range from 8% to 12% of the monthly rental income.

2. Vacancy Rate
Investors should plan for vacancy rates, which show the percentage of time the property might be empty and not making money. We assume a vacancy rate of 5%.

3. Maintenance
Maintenance costs refer to the monthly costs needed to keep the property in good condition. This can involve routine repairs, landscaping, pest control, and seasonal maintenance.

4. Insurance
Insurance covers the cost of protecting the property against risks like fire, theft, vandalism, and natural disasters. Investors usually need both property and liability insurance and can pay these premiums monthly or annually. Annual payments might be cheaper, but some investors prefer to pay in smaller monthly installments. In this example, we assume a monthly rate.

5. Property Taxes
Property taxes are annual taxes paid to the local government based on the property's value. These taxes fund public services like schools, roads, and emergency services.

6. CapEx
CapEx, or capital expenditures, is money spent to buy, fix, or improve a property. For example, this could be replacing the roof, doing major plumbing work, or getting new appliances. Even though it costs money up front, it can help investors make more by increasing the property’s value and lowering maintenance costs.

7. Expenses Subtotal
The expenses subtotal is the sum of all costs related to property management fees, vacancy, maintenance, insurance, property taxes, and capital expenditures. This number is essential in calculating annual operating expenses, annual cash flow, and net operating income.

8. Monthly Loan Payment
Monthly loan payment is the amount of money an investor needs to pay the lender each month for their mortgage. This number factors in interest, the original loan amount, and the loan term.

Value Growth

1. Appreciation
Appreciation is how much a property increases in value over time. This can happen for several reasons, like improvements in the neighborhood or renovations made to the property. Appreciation positively affects ROI because it increases the property's overall value. This means investors can potentially sell the property for more than they originally paid for it.

2. Annual Rent Increase
Annual rent increase refers to how much rental-related costs and values will rise every year. This can include rises in property management fees, maintenance costs, insurance premiums, property taxes, and other operational expenses. This number helps investors predict future expenses and adjust rental rates to cover costs.

What Is a Good Cap Rate?

Determining a good cap rate is very specific to individual investors and their properties. Most investors say a good cap rate is between 5-10%.

• A high cap rate typically indicates a lower property value, which might mean a riskier investment. However, an investment with a higher cap rate might yield higher returns sooner.
• A low cap rate suggests the property is less risky and might have better long-term value if an investor intends to sell down the road. A property with a high cap rate is often a safer investment but may not offer an immediate return.

3. CoC (Cash-on-Cash Return)
Cash on cash return is a way to measure the performance of a rental property investment. It shows the annual profit you make compared to the amount of money you initially invested out of your own pocket. To calculate it, you divide the annual pre-tax cash flow (the money you earn from the property in a year after paying expenses but before taxes) by the total cash you invested.

What Is a Good Cash-on-Cash Return?

A good cash-on-cash return depends on several factors, including the current market and how much an investor thinks their property will grow in value over time. Many investors agree that a CoC return of 7-12% indicates a good investment.

4. Net Operating Income (NOI)
Net Operating Income (NOI) is the total income from the property minus the operating expenses. It’s an important number that shows how well a property is doing financially and is used in various profitability metrics.

5. Initial Investment
Initial investment refers to the sum of all costs investors pay out of pocket when buying a property. These costs include down payments, closing costs, repairs, and any other fees not covered by a loan.

6. Gross Rent Multiplier
The Gross Rent Multiplier (GRM) is a quick way of estimating a rental property’s value. It helps you figure out if a property is a good investment based on how much rent it brings in.
To find the GRM, divide the property's purchase price by its annual gross rental income.

GRM = Purchase Price / Annual Gross Rental Income

While GRM alone doesn’t give a complete picture, it’s a quick way to filter properties before diving into more detailed ROI calculations.

What Is a Good GRM?

A lower GRM suggests a better investment because it means you’re paying less for each dollar of rental income. Most experts suggest a GRM between 4-7 as a standard benchmark.

Knowing these terms helps investors make smart choices, predict financial results accurately, and get the most out of their investment.