ROI Calculator Real Estate

Let your lenders and customers quickly assess how much cash flow they can generate from rental and lease payments with a Rental ROI Calculator.

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What is a Rental Property ROI Calculator?

A Rental ROI Calculator is an essential tool for real estate investors who want to quickly figure out how much cash flow they can generate from rental and lease payments after accounting for out-of-pocket and operational expenses, such as maintenance costs, taxes, insurance and mortgage payments, as well as vacancy rates.

Aside from calculating the total cash flow, a good Rental ROI Calculator will also show the Cash-on-Cash Return and Capitalization Rate so you can easily evaluate whether a residential or commercial property is worth the investment.

How to Calculate ROI for a Rental Property

Before you can calculate for a rental property’s ROI, you’ll first need to figure out your Net Operating Income or NOI. NOI is calculated by subtracting a rental property’s annual operating expenses from its gross operating income.

Net Operating Income = Gross Operating Income – Operating Expenses

A good chunk of a rental property’s gross operating income comes from rental and lease payments. But larger multi-family homes and commercial properties can also generate additional income by charging for:

  • Parking
  • Storage
  • Utilities
  • Laundry Facilities

A rental property’s operating expenses typically include:

  • Property taxes
  • Insurance
  • Repair and maintenance costs
  • Property management fees (when you are not managing the property yourself)

Do take note that operating expenses do not include your mortgage payments if you’re borrowing money to purchase the property. Net Operating Income is one of the first things creditors and lenders look at to determine a rental property’s income generation potential. By leaving out the variables of mortgage terms and payments, it’s easier to accurately compare the profitability of different real estate rental properties on an apples-to-apples basis.

One of the most popular ways to evaluate and compare the profitability and potential returns of different real estate investments is by looking at a rental property’s Capitalization Rate or Cap Rate. Capitalization Rate can be easily calculated by dividing your annual NOI with the current market value of the property.

Cap Rate = (Net Operating Income ÷ Current Market Value) x 100%

A higher cap rate means higher income potential. Most investors look for a cap rate of at least 6%, but if you’re in an expensive city with inflated real estate prices, you might be looking at cap rates of around 4% or even less.

Cap rates tend to be smaller for Single Family Rentals (SFRs) and smaller Multi-Family Rentals (MFRs) compared to apartment buildings and commercial properties. Cap rates for commercial properties can be as high as 10% or more. A 10% cap rate means you can potentially get a return on your investment (ROI) in roughly 10 years if you bought the property entirely in cash.

Cap rate is really useful for comparing similar real estate opportunities. Obviously, the properties with higher cap rates are going to be more attractive investments. It’s all part of the due diligence required to find the best value and best deals possible.

How to Calculate Cash Flow and Cash-on-Cash ROI for a Rental

Net Cash Flow is your actual profits after subtracting your mortgage payments from your NOI. You’ll get the same figure if you deduct all your operating expenses and mortgage payments from your total rental income.

Net Cash Flow = Net Operating Income - Mortgage Payments

Another important metric that a lot real estate investors look at to determine their ROI and profitability is Cash-on-Cash Returns.

Most investors use financing or levarage to build up their real estate rental portfolio since all they need to do is put up a relatively small down payment and use their rental income to pay off the mortgage. With this strategy, you don’t need to have millions of dollars up front to have multiple rental units.

To calculate for Cash-on-Cash Returns, you need to figure out your Net Cash Flow first.

Net Cash Flow is your actual profits after subtracting your mortgage payments from your NOI. You’ll get the same figure if you deduct all your operating expenses and mortgage payments from your total rental income.

Net Cash Flow = Net Operating Income - Mortgage Payments

Cash-on-Cash Return (CCR) or Cash Flow Return on Investment simply calculates how much Net Cash Flow you get back for all the cash you’ve invested.

Cash-on-Cash Return = (Annual Net Cash Flow ÷ Total Cash Invested) x 100%

Example:

If you put 20% down on a rental property that’s worth $100,000 and spend $5,000 on renovations and closing costs, your total cash investment is $25,000. Renting it out for $1,000 a month nets you $250 in cash flow after deducting your mortgage payments from your NOI. $250 a month gives you a Net Cash Flow of $3,000 per year.

($3,000 ÷ $25,000) x 100% = 12%

If we plug these numbers into our Cash-on-Cash Return formula, we get a CCR of 12%. At this rate, you’re looking at around 8 years before you get back your initial investment, but you can also increase cash flow over time by raising the rent.

What’s a Good ROI for a Rental Property?

Most real estate investors look for Cash-on-Cash returns of at least 12% to 14%. This already beats the average performance of the U.S. stock market which stands at around 7% to 10%. Some people have more aggressive financial targets and don’t invest in anything with less than 20% Cash-on-Cash ROI.

Another thing to keep in mind is that you’re also building up your equity in the property as you pay off the loan’s principal. The property’s market value could appreciate significantly depending on market demand and your rental property’s location. Even though a rental ROI calculator is very helpful in evaluating a real estate deal, there are lots of intangibles and unpredictable events that could affect your profitability, so it’s always a good idea to target real estate investments that can potentially give you higher ROI to offset any unforeseen costs and major repairs.

The 1% Rule

A common rule of thumb that’s often thrown around is the 1% rule.

The rule basically states that your monthly rent should be equal to 1% of the property’s acquisition cost.

If you buy a rental for $90,000 and spend $10,000 to fix it up, your rent should be $1,000 per month which is 1% of the $100,000 you spent.

This rule isn’t going to work in a lot of markets. In an expensive city, you’re likely going to get much less than 1% in rent. In a cheaper market with a decent demand for rentals, you might even get up to 2%.

If you want to get the most returns and value out of your real estate investment, you really have to look at comps or comparable data. Check out properties with similar features in the same area and find out how much they sold for and how much people are paying to rent these properties. Using comps lets you figure out if you’re getting a fair deal and if the income generation/appreciation potential is actually worth it.

How Do I Create a Customized Rental ROI Calculator?

Adding a custom Rental Property ROI calculator to your website can help you attract new clients and leads who are interested in real estate investments.

Lots of different businesses and practices that deal with real estate, mortgages and investments can benefit from a Rental ROI Calculator. These can include but are not limited to:

  • Financial institutions
  • Mortgage lenders
  • Financial advisors
  • Real estate agents
  • Property managers

You can use our Rental ROI calculator template or any of our other premade templates as a starting point.

You can also create your own calculator from scratch using our calculator builder without any advanced coding skills or knowledge. Simply paste any existing formulas you already use in Excel and Google Sheets and you can customize the UI however you want. If you want to learn more, head on over to our Help section where we have tutorials that will guide you from start to end.

You can start adding multiple calculator forms to your website today completely free of charge. We’ll only start charging your account once you’ve reached 100 monthly visitors. Our pricing model is also very reasonable and will cost less per month than what an experienced developer usually charges per hour.

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