What is cap rate and why does it matter?

Cap rate (capitalization rate) is the ratio of a property's annual Net Operating Income (NOI) to its purchase price. It measures the unlevered yield of the asset, independent of financing. A higher cap rate means the property generates more income relative to its cost. Cap rates vary by market: coastal cities often have 3%–5%, Midwest and Sun Belt cities 6%–9%.

What is cash-on-cash return?

Cash-on-cash return is the ratio of annual cash flow (after mortgage payments) to the actual cash invested (typically the down payment). Unlike cap rate, it accounts for financing. A property can have a 5% cap rate but a 12% cash-on-cash return with a 25% down payment, because the mortgage amplifies the return on your invested capital.

What is NOI (Net Operating Income)?

NOI is a property's annual income from rent (after vacancy) minus operating expenses (tax, insurance, HOA, maintenance, management). It excludes mortgage payments and depreciation. NOI is the income line that determines a property's value: lenders and appraisers typically value rental properties by dividing NOI by the prevailing cap rate.

What is a good cap rate for a rental property?

A 'good' cap rate depends on your market and goals. The U.S. residential average is roughly 5%–6%. Coastal cities (San Francisco, NYC) often see 3%–5% as 'good' because appreciation expectations are higher. Midwest and Sun Belt markets (Cleveland, Memphis, Phoenix) often see 7%–10% as normal. The 1% rule — monthly rent ≥ 1% of purchase price — is a quick screening tool but is hard to achieve in expensive markets.

How much should I budget for vacancy and repairs?

A safe rule: budget 5%–8% of gross rent for vacancy (the time between tenants) and 5%–10% of property value for annual maintenance and capital expenditures (roof, HVAC, appliances). Landlords who self-manage can lower vacancy costs; landlords in cold climates should budget more for heating-system repairs. Older properties need larger repair reserves.

Should I hire a property manager?

Property management typically costs 8%–12% of monthly rent. It's worth it if you don't live nearby, don't have time for tenant issues, or own multiple units. Self-managing saves the fee but requires 5–10 hours per month per unit (tenant calls, lease renewals, maintenance coordination, evictions). The decision often comes down to opportunity cost: what else could you do with that time?

What is the debt service coverage ratio (DSCR)?

DSCR is the ratio of annual NOI to annual mortgage payments. A DSCR of 1.0 means NOI exactly covers the mortgage; 1.2 means NOI is 20% higher than debt service (a comfortable margin); below 1.0 means the property doesn't cover its own debt from operations. Commercial lenders typically require DSCR ≥ 1.2 for rental-property loans.

How much do I need for a down payment on a rental property?

Most lenders require 20%–25% down for non-owner-occupied homes. Some loan programs (FHA, VA) allow lower down payments for primary residences but not for rentals. Higher down payments lower your monthly payment and improve cash flow but reduce the cash-on-cash return. Plan for 3%–5% of the price in closing costs on top of the down payment.

Investment Property Calculator

An investment property calculator is a free online tool that analyzes a rental property's cash flow, cap rate, and cash-on-cash return. It factors in vacancy, maintenance, and property management costs. Free, no sign-up required.

Investment Property Details

Property Price?Enter your property price.

Down Payment?The amount you plan to pay upfront when purchasing the home.

Mortgage Rate?The annual interest rate on the mortgage loan.

Loan Term?The length of your mortgage in years. Common terms are 15 or 30 years.

Property Tax Rate?The annual property tax rate as a percentage of home value.

Annual Insurance?Enter your annual insurance.

HOA Fees?Monthly homeowners association (HOA) fees, if applicable.

Monthly Rent?The monthly rent amount you currently pay or expect to pay.

Vacancy Rate?Expected percentage of time the property is vacant.

Maintenance Rate?Enter your maintenance rate.

Management Rate?Enter your management rate.

Appreciation Rate?Expected annual home value appreciation.

End of inputs

Investment Property Analysis

Monthly Cash Flow

-$599.09

-$7,189.04 / year

Cap Rate

3.93%

NOI / price

Cash-on-Cash

-8.22%

Annual cash flow / down

Annual NOI

$13,768.00

Before debt service

Loan Amount

$262,500.00

After down payment

Monthly P&I

$1,746.42

Mortgage payment

Monthly Cash Flow Breakdown

Annual NOI vs Debt Service

Key Insights

Your cash flow is negative — $7,189.04/year ($599.09/month) out of pocket. You're paying the tenant's rent shortfall every month. This works only if appreciation and equity build-up exceed the cash flow drain. Renegotiate the price, raise rent, or increase the down payment.

Your -8.22% cash-on-cash return is below your 7.00% mortgage rate — this is negative leverage. The property's yield doesn't cover the financing cost, so appreciation and equity build-up are the only sources of return. Acceptable in high-appreciation markets but risky long-term.

Your 3.93% cap rate is low — below the 5%–6% U.S. average. This is common in high-appreciation coastal markets (where investors accept low yields for growth) but risky in flat markets. The property barely covers expenses before debt service; with a mortgage, cash flow will likely be negative.

Your 25.00% down payment is standard for investment property — most lenders require 20%–25% down for non-owner-occupied homes. This balances leverage and safety: you benefit from appreciation on the full property value while keeping monthly payments manageable.

Your 3.00% appreciation assumption is realistic — in line with the U.S. long-term average. Appreciation is the primary wealth builder in real estate; compounding over 10+ years is powerful. Local markets vary widely: verify with historical price data for your specific ZIP code.

Your operating expenses of $942.67/month are 42.85% of rent — within the typical 40%–55% range for residential rentals. Tax, insurance, maintenance, vacancy, and management are all accounted for.

Summary: Effective gross income $2,090.00/mo − operating expenses $942.67/mo − mortgage P&I $1,746.42/mo = -$599.09 monthly cash flow. Cap rate 3.93%, cash-on-cash -8.22%.

Guide

How to Use This Calculator

1Enter the property purchase price in the Property Price field.
2Set the down payment. Most rental-property loans require 20%–25% down.
3Set the mortgage rate. Investment-property rates are typically 0.5%–0.75% higher than primary-residence rates.
4Choose the loan term (typically 30 years for rentals to maximize cash flow).
5Enter the property tax rate, annual insurance, and any HOA fees.
6Set the monthly rent you expect to charge. Verify with local rental comps (Zillow, Rentometer, Craigslist).
7Set the vacancy rate (typically 5%–8% of gross rent) to account for tenant turnover.
8Set the maintenance rate (typically 1%–2% of property value per year) to account for repairs and capital expenditures.
9Set the management rate (0% if self-managing, 8%–12% if hiring a property manager).
10Set the expected annual appreciation rate. The U.S. long-term average is 3%–4%.
11Review monthly cash flow, cap rate, and cash-on-cash return, and read the AI insights for guidance on whether the deal pencils out.

Formula

How It's Calculated

Investment property cash flow analysis combines three metrics:

1. Net Operating Income (NOI):
   NOI = (Gross Rent × (1 − Vacancy Rate) − Operating Expenses) × 12
   where Operating Expenses = Property Tax + Insurance + HOA + Maintenance + Management

2. Cap Rate:
   Cap Rate = NOI / Purchase Price

3. Cash-on-Cash Return:
   Cash-on-Cash = Annual Cash Flow / Down Payment
   where Annual Cash Flow = NOI − Annual Mortgage P&I

Debt Service Coverage Ratio (DSCR):
  DSCR = NOI / Annual Debt Service
  Lenders typically require DSCR ≥ 1.2 for rental loans

Example: $350,000 property, 25% down ($87,500), 7% rate, 30 years
  Loan amount = $262,500
  Monthly P&I = $1,747
  Property tax = $350/month (1.2% × $350,000 / 12)
  Insurance = $125/month
  Vacancy (5% on $2,200 rent) = $110/month
  Maintenance (1% × $350,000 / 12) = $292/month
  Management (8% × $2,200) = $176/month
  Total OpEx = $953/month
  Effective gross income = $2,090/month
  NOI = ($2,090 − $953) × 12 = $13,644/year
  Cap rate = $13,644 / $350,000 = 3.90%
  Annual cash flow = $13,644 − $20,964 = −$7,320 (negative)
  Cash-on-cash = −$7,320 / $87,500 = −8.4% (negative)

Glossary

Key Terms

FAQ

Frequently Asked Questions

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