How this calculator works
A rental property is judged on two things: the cash it produces while you own it and what you are left with when you sell. Net operating income starts with the rent you actually collect after an allowance for vacancy and unpaid rent, then subtracts the costs of running the property: management, property tax, insurance, maintenance and any condo fee. The mortgage payment is not part of net operating income because it depends on how the purchase was financed, not on how the property performs. Cash flow is what remains after the mortgage payment. The capitalization rate divides net operating income by the purchase price and lets you compare properties of different sizes; the cash-on-cash return divides annual cash flow by the cash you put in, which is the down payment plus closing costs if you include them. Over a holding period the total profit adds the cash flow collected to the net sale proceeds, less the cash invested. The model assumes rent and operating costs stay flat in dollar terms, a fixed-rate mortgage, and no capital improvements beyond ordinary maintenance. It ignores income tax, which can change the answer a lot once mortgage interest and depreciation are considered, and it ignores the risk that a large repair lands in a bad year.
Formula
Loan = price - down payment. Monthly payment = loan x r / (1 - (1 + r)^-n), with r the monthly rate and n the number of payments. Effective income = gross rent x (1 - vacancy rate). Operating expenses = management + property tax + insurance + maintenance + 12 x condo fee. Net operating income = effective income - operating expenses. Annual cash flow = net operating income - 12 x mortgage payment. Cap rate = net operating income / price. Cash-on-cash return = annual cash flow / down payment. Total profit = annual cash flow x years + (sale price x (1 - selling costs) - loan balance) - down payment.
Worked example
A $400,000 property with $80,000 down and a 5% mortgage over 25 years has a $320,000 loan and a monthly payment of $1,870.69. Rent of $2,400 a month is $28,800 a year; after 5% vacancy the collected rent is $27,360. Management at 8% is $2,188.80, and with $4,200 of tax, $1,400 of insurance and $2,400 of maintenance the operating expenses are $10,188.80, leaving net operating income of $17,171.20. That is a 4.29% cap rate. After mortgage payments of $22,448.26 a year the cash flow is -$5,277.06, a cash-on-cash return of -6.60%. Over ten years at 3% growth the property sells for $537,567; after 5% selling costs and the $236,558 loan balance the net proceeds are $274,130. With ten years of negative cash flow the total profit is about $141,359 on $80,000 invested, a 177% total return that depends almost entirely on the sale price.
Advertisement
Frequently asked questions
Why is the mortgage payment excluded from net operating income?
Net operating income measures the property, not the financing. Two owners of the same building with different loans have the same net operating income. This is why cap rates can be compared between buyers who borrow differently.
What is a good cap rate?
It depends on the market and the risk. Low cap rates in expensive cities reflect expectations of price growth; higher cap rates in smaller markets reflect higher yields and often more risk. Compare like with like, and never treat a cap rate as a guaranteed return.
Should I include closing costs in the cash invested?
Yes for an honest cash-on-cash return. Legal fees, land transfer tax and inspection costs are real cash out. This calculator uses the down payment alone so the figure stays easy to follow; add closing costs to the down payment if you want the stricter number.
Does the calculator include income tax?
No. Tax depends on your marginal rate, on whether mortgage interest and depreciation are deductible, and on the country. In Canada, rental income and expenses are reported annually and the sale may trigger capital gains tax; a tax professional should model that separately.
What happens if cash flow is negative?
You are covering the shortfall from other income, betting that the property grows or that rent rises. Negative cash flow is not automatically bad, but it makes the investment dependent on the sale price, which is the least certain part of the return.