About the Rental ROI
Two rental properties with identical purchase prices can be very different investments depending on rent, expenses, and financing - cap rate and cash-on-cash return are the two metrics serious real estate investors use to tell them apart. Our Rental Property ROI Calculator computes both instantly.
How It Works
The calculator finds annual net operating income (rent minus operating expenses, excluding the mortgage) and divides it by the purchase price for cap rate - a measure of the property's return independent of financing. It separately subtracts mortgage payments from NOI to find annual cash flow, then divides that by your actual cash invested (the down payment) for cash-on-cash return - the metric that reflects your real leveraged return.
Formula & Methodology
Cap rate deliberately excludes financing so investors can compare properties on their own merits, as if bought entirely with cash - it's a pure measure of the property's operating return relative to its price. Cash-on-cash return instead measures what actually matters to a leveraged buyer: the return on the cash you personally put in (the down payment), after the mortgage payment is subtracted from operating income. Leverage is why cash-on-cash return can exceed cap rate - you're earning a return on the full property value while having only invested a fraction of it as cash.
Step-by-Step: Calculating It By Hand
- 1Calculate annual rental income and subtract annual operating expenses (excluding the mortgage) to find net operating income (NOI).
- 2Divide NOI by the purchase price to find cap rate.
- 3Subtract annual mortgage payments from NOI to find annual cash flow.
- 4Divide annual cash flow by the down payment (actual cash invested) to find cash-on-cash return.
Examples
Solid cash flow
A $250,000 property with $2,200 monthly rent, $500 monthly expenses, and a $1,100 mortgage payment on a $50,000 down payment produces a healthy cap rate and an even stronger cash-on-cash return, since leverage amplifies the return on actual cash invested.
Why the two metrics differ
Cap rate ignores financing entirely, while cash-on-cash return reflects the actual leverage used - a property can have a modest cap rate but a strong cash-on-cash return if financed well, or vice versa.
Advantages
- Calculates both cap rate and cash-on-cash return, the two standard metrics investors compare
- Separates the financing-independent view (cap rate) from the leveraged view (cash-on-cash)
- Useful for comparing multiple potential rental property purchases
- Makes it easy to see how financing terms change your actual return
Common Mistakes
- Comparing cap rates across properties with very different expense structures without verifying expense estimates
- Ignoring cash-on-cash return and only looking at cap rate, missing the real leveraged return picture
- Underestimating maintenance, vacancy, and property management costs in the monthly expenses figure
- Not accounting for appreciation potential, which neither metric captures directly
Edge Cases to Watch For
- Vacancy periods reduce actual rental income below the full potential rent used in an optimistic NOI estimate - a realistic vacancy allowance should be built into the expense assumptions.
- Major capital expenditures (roof, HVAC replacement) aren't part of routine operating expenses but should be reserved for separately when evaluating true long-term returns.
- A property with negative cash flow but strong appreciation potential can still be a reasonable investment thesis that neither cap rate nor cash-on-cash return alone captures.
- Cap rate comparisons only make sense between similar property types and markets - a 5% cap rate can be excellent in one market and poor in another.
Common Use Cases
- Comparing multiple potential rental property investments
- Evaluating whether a specific property's asking price justifies the expected rent
- Understanding how financing terms affect your actual leveraged return
- Reporting investment performance using standard real estate metrics