Calculate a rental property's monthly cash flow, cap rate and cash-on-cash return from its purchase price, rent and expenses.
Google AdSense Banner
This area will contain advertisements after approval.
Google AdSense Banner
This area will contain advertisements after approval.
Cap rate (capitalization rate) measures a property's return as if bought entirely in cash: annual Net Operating Income ÷ purchase price, ignoring financing. Cash-on-cash return instead measures the return on the actual cash you invested (your down payment): annual cash flow after the mortgage payment ÷ down payment. The two can differ significantly on a leveraged purchase.
Net Operating Income (NOI) is rental income minus operating expenses, before the mortgage payment. Cash flow subtracts the mortgage payment too, showing what's actually left in your pocket each month.
Operating expenses typically include property tax, insurance, maintenance and repairs, property management fees, and a vacancy allowance, but exclude the mortgage payment itself, which is entered separately.
A $250,000 property, $50,000 down payment, $2,200 monthly rent, $500 monthly operating expenses, and a $1,100 monthly mortgage payment: monthly NOI = $2,200 − $500 = $1,700, so monthly cash flow after the mortgage = $1,700 − $1,100 = $600, or $7,200 a year. Cap rate = ($1,700 × 12) ÷ $250,000 × 100 = 8.16%, ignoring financing entirely. Cash-on-cash return instead compares that $7,200 annual cash flow to just the $50,000 actually invested: $7,200 ÷ $50,000 × 100 = 14.4%, notably higher than the cap rate here because the mortgage rate is lower than the property's return, a case of positive leverage.
Underestimating operating expenses, forgetting a vacancy allowance, maintenance reserve, or property management fee makes cash flow and returns look better than they'll actually be.
Comparing cap rates across very different markets without adjusting for risk, a higher cap rate in a declining market isn't automatically a better deal than a lower cap rate in a stable one.
Ignoring that cash-on-cash return only reflects year one, it doesn't account for rent growth, appreciation, or how the numbers change once the mortgage is eventually paid off.
It varies by market, but 4-10% is a common general range, lower in expensive, low-risk markets and higher in markets with more risk or lower property prices. Compare against similar properties in the same area.
When you finance part of the purchase with a mortgage at a lower rate than the property's cap rate, leverage amplifies your return on the cash you actually put in, this is often called 'positive leverage.'
Google AdSense Banner
This area will contain advertisements after approval.