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HOME RENTAL CALCULATOR

Analyze potential rental property investments with comprehensive metrics including Cash-on-Cash Return, Cap Rate, IRR, and multi-year pro forma projections with tax considerations.

📊 Key Metrics & Targets

Target ranges: Cap Rate 5-10%, Cash-on-Cash 8-12%, IRR 15-20%, DSCR >1.25x, LTV <75%, Equity Multiple 2-3x. Use the 1% rule as a quick filter.

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Capitalization Rate (Cap Rate) is the most commonly used metric in real estate investing. It tells you what return you'd earn on a property if you paid all cash—a useful way to compare properties regardless of financing.

The formula is simple: Cap Rate = Net Operating Income (NOI) ÷ Property Value. If a property generates $24,000/year in NOI and is worth $300,000, the cap rate is 8% ($24,000 ÷ $300,000).

What's a good cap rate? It depends on the market and property class. Class A properties (new, prime locations) might have 4-5% cap rates. Class B properties typically run 6-8%. Class C properties (older, more management-intensive) might offer 9-12%. Higher cap rates generally indicate higher risk or more work.

Cap rates also vary by location. Major metros like San Francisco or NYC might see 3-4% cap rates, while smaller markets offer 8-10%. This doesn't mean smaller markets are "better"—appreciation potential and tenant quality differ.

Limitations of cap rate: it doesn't account for financing (your actual returns with a mortgage will differ), it's a snapshot in time (NOI can change), and it assumes current rent levels continue. Use cap rate to screen and compare properties, but dig deeper before making decisions.

Points clés

  • ✓Cap Rate = NOI ÷ Property Value—shows all-cash return
  • ✓Higher cap rates generally mean higher risk or more work
  • ✓Compare cap rates within the same market and property class
  • ✓Cap rate doesn't account for appreciation or financing effects

While cap rate shows the property's performance, Cash-on-Cash Return shows YOUR performance as an investor. It accounts for financing—crucial since most investors use mortgages.

The formula: Cash-on-Cash Return = Annual Cash Flow ÷ Total Cash Invested. If you put $60,000 down (plus closing costs) and receive $6,000/year in cash flow after all expenses including mortgage, your cash-on-cash return is 10%.

This metric is powerful because it accounts for leverage. A property with 5% cap rate might deliver 12% cash-on-cash if you finance 75% of the purchase. Leverage amplifies your returns (and risks).

Target cash-on-cash returns vary, but many investors seek 8-12% in today's market. Returns below 8% may not justify the work of being a landlord. Returns above 15% often indicate higher risk or significant value-add opportunity (a fixer-upper, for example).

Important: Cash-on-cash only measures annual cash flow. It doesn't capture appreciation, principal paydown (equity building through mortgage payments), or tax benefits. A property with 6% cash-on-cash might still be excellent if it's appreciating 5%/year and you're building equity through loan paydown.

Points clés

  • ✓Cash-on-Cash = Annual Cash Flow ÷ Cash Invested
  • ✓Accounts for financing—shows your actual return
  • ✓Target 8-12% cash-on-cash for most rental properties
  • ✓Doesn't capture appreciation, equity building, or tax benefits

The 1% Rule is a quick screening tool used by real estate investors: a property's monthly rent should be at least 1% of the purchase price. A $200,000 property should rent for at least $2,000/month.

This rule helps quickly filter properties. In many markets, properties that meet the 1% rule will cash flow positively after expenses. Properties far below 1% (like 0.5%) typically won't cash flow and rely entirely on appreciation.

The 1% rule has become harder to achieve in appreciation-focused markets. In cities like San Francisco, Denver, or Austin, properties might rent for 0.4-0.6% of their value. Investors in these markets often accept negative or break-even cash flow, betting on appreciation.

Conversely, some Midwest and Southern markets offer 1.5-2% ratios. These properties cash flow well but may have slower appreciation, older housing stock, or more challenging tenant management.

Use the 1% rule as a first filter, not a final decision maker. A property at 0.9% with excellent appreciation potential and A+ tenants might outperform a 1.2% property with deferred maintenance and tenant turnover. Context matters.

Points clés

  • ✓Monthly rent should be ≥1% of purchase price for cash flow
  • ✓Harder to find in high-appreciation coastal markets
  • ✓More common in Midwest and South, but may mean less appreciation
  • ✓Use as a quick filter, not the only decision criteria

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Cap rates vary by market and property class. Class A properties (new, prime locations) typically have 4-5% cap rates. Class B properties run 6-8%. Class C properties (older, more management-intensive) might offer 9-12%. Higher cap rates generally indicate higher risk or more work. Compare cap rates within the same market—a 5% cap rate in San Francisco might be excellent while 5% in a rural Midwest market is below average. Also consider appreciation potential, not just current cap rate.

The 1% rule is a quick screening tool: monthly rent should be at least 1% of the purchase price. A $200,000 property should rent for at least $2,000/month. Properties meeting this rule typically cash flow positively. It's harder to find in expensive markets (coastal cities might be 0.4-0.6%) and easier in lower-cost markets (some areas offer 1.5%+). Use it as a first filter—properties failing this rule may still work if you're prioritizing appreciation.

Cash-on-Cash Return = Annual Cash Flow ÷ Total Cash Invested. Annual cash flow is rental income minus all expenses (mortgage, taxes, insurance, maintenance, vacancy, management, etc.). Total cash invested includes down payment plus closing costs plus any immediate repairs. If you invested $60,000 and receive $6,000/year in cash flow, your cash-on-cash return is 10%. This metric shows your actual return, accounting for leverage, and is more useful than cap rate for evaluating your investment.

Common expense categories: mortgage payment (if financed), property taxes, insurance (landlord policy costs more than homeowner's), maintenance/repairs (budget 1-2% of property value annually), capital expenditures (roof, HVAC, appliances—set aside money monthly), vacancy (typically 5-8% of rent), property management (8-12% of rent if not self-managing), utilities (if landlord-paid), and HOA fees if applicable. Underestimating expenses is the most common mistake new investors make.

Self-management saves 8-12% of rent but requires: tenant screening, lease preparation, rent collection, maintenance coordination, handling emergencies, legal compliance, and evictions if necessary. It works best if: you enjoy real estate, live near the property, have time and skills, and have few properties. Property management makes sense if: you value your time highly, live far from the property, want true passive income, or have multiple properties. Many investors self-manage initially, then hire managers as they scale.

Investment properties typically require 15-25% down (higher than primary residences). More down payment means: lower monthly payment, better cash flow, easier loan approval, and lower interest rate. However, it also means more capital tied up in one property. Some investors prefer lower down payments to buy more properties (greater leverage, more risk). Others prefer higher down payments for stability. Consider your risk tolerance, cash reserves, and whether you'd rather have one property fully paid or several with mortgages.

Key tax benefits include: depreciation (deduct a portion of the building's value each year even if it's appreciating), mortgage interest deduction, operating expense deductions (repairs, insurance, management fees, etc.), and potentially a 20% pass-through deduction (QBI). When you sell, you can defer capital gains through a 1031 exchange into another property. These tax benefits often make real estate returns higher after-tax than comparable stock market returns. Consult a tax professional to maximize benefits.

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Disclaimer: This calculator provides estimates for educational purposes only and does not constitute financial, investment, or real estate advice. Rental income projections, property valuations, and expense estimates may vary significantly from actual results. Always consult a qualified financial advisor, real estate professional, or tax advisor before making investment decisions.

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