Rental property calculator

Owning real estate and renting it out is a smart way to make residual income every month. Rental properties have a cap rate (more on that below) that can help you understand how much you’ll make from an investment annually.

A rental property calculator can help calculate the income using the cap rate formula.

Investment Property Calculator

Real estate investment is easy once you have a pulse on the market. A lot of investors recommend that when you buy a house, you consider the:

• Location
• Rental return

Our cap rate calculator, available with a web browser extension or plugin, makes figuring out your yield a breeze.

A single click provides you with information on:

• Performance metrics
• Nearby rents
• Comparable properties
• Welcome tax
• Proximity to schools, shops, etc.

The information provided will help you better understand how a property is expected to perform using current market data. Researching and performing due diligence on an investment is one of the key methods to reduce the risk of investment failure.

How to use our calculator

Real estate can be difficult to find and assess. Our calculator helps you find the best real estate in seconds. Your first step is to download the extension or add-on appropriate for your browser. There are options for Chrome, Firefox and Edge.

Once you do that, it takes just three key steps to start using our extension properly.

1. Compare

Navigate to your favorite listing site. As the properties load, you’ll find profitability indicators that have been added to the page in a big, green circle. These indicators will have your gross income multiplier, or MBR listed.

If you tap the letter “R” on your toolbar, you’ll be able to select different indicators, including gross income multiplier, net income multiplier, global discount rate, gross rental yield and lifestyle indicator.

In-depth information will be provided in the extension.

2. Filter

On your favorite site, look for the main indicator, which is the top icon on the side bar of the page. This icon allows you to filter through all of the properties based either on lifestyle or profitability.

Filter to properties that have a cap rate that you can be comfortable with.

Investors trying to maximize the potential of a rental portfolio should use filters and maintain a portfolio of properties with varying cap rates.

3. Evaluate

There are times when an “i” icon is on the page. Hover over this icon for a property that you’re most interested in purchasing to learn more about the values calculated. You can additionally plug in some value you may want to change to see how the cap rate calculator changes when you charge more or less rent.

Some properties may not have information, which means that not enough information was available. You can try and adjust the gross annual income on your own in this case and determine the net revenue multiplier, cap rate and gross yield.

If you sign up, which we recommend that you do, you’ll also see all of the additional costs and expenses for a property. It’s easier to have a complete picture of expenses by signing up and clicking on the Financial tab at the top of the extension.

You can also opt to favorite a property so that you can come back to it in the future.

What is the Capitalization Rate Formula?

The cap rate formula is simple and easy to follow, and you’ll need two main numbers to move forward:

• Net operating income
• Property value

Once you have these two numbers, you can find the cap rate with: net operating income / property value.

Simple and straightforward, the cap rate allows you to understand the return rate of the property. Of course, this is a base formula. You can obviously add in other variables to better understand what your rate should be. Vacancy rates and operating expenses will both impact your income.

With our built-in cap rate calculator, you’re able to calculate the rate without a complicated formula.

What Is the Cap Rate?

While it’s important to look at the price of a property to know how much you’ll have to spend in upfront costs, you also need to know what the cap rate is to better understand your returns. As for a definition of this key rate, the definition would be a person’s rate of return on an investment property.

A good example of this would be:

• Purchase a property for $200,000
• Rent the property at a rate of $20,000 per year

The cap rate formula above would indicate that the cap rate is $20,000 / $200,000, leaving you with a cap rate of 10%. After putting all of this money back into paying the property, you can expect to make money in 10 years.

Using our rental property calculator, it’s easy to calculate all of these figures to better understand how much return on investment you’ll make annually.

What Factors Affect the Cap Rate?

There are several factors that may affect your cap rate, including:

Location

What’s the most important thing in real estate? Location. The location of the property will ultimately affect the cap rate. How healthy is the local economy? Are there enough jobs to support a healthy rental market? How difficult will it be to find consistent tenants for the property?

Properties in large metropolitan areas generally have low cap rates, which means that they’re considered safe investments. These areas tend to have expensive real estate, healthy job markets and thriving economies. Property owners won’t have much trouble finding consistent tenants.

Asset Type

What type of property do you want to invest in? The type you choose will have a significant impact on your cap rate.

• Commercial properties generally have much higher cap rates because the risk is significantly higher. If the economy takes a turn for the worse, you may have a much harder time finding consistent tenants.
• Residential properties usually have lower cap rates because, no matter what, people always need housing. It’s acceptable for the cap rate to be slightly lower with a residential property.

Your strategy will also impact the cap rate. If you plan to use a residential property as a high-end vacation rental, your average rent will be significantly higher. However, you can also expect to pay more in maintenance than you would with a long-term rental. There's also the risk that your rental will remain vacant during the off-season, which will reduce your income.

Supply and Demand

Is there demand for rental properties in the area? How many other rentals are available in the local market?

You may find a property offered at a great price, but if demand is low, it may not be worthwhile. The rental market may be saturated, which may force you to rent at a much lower price than you originally planned.

Other Investment Property Metrics

Properties have a lot of metrics that investors should know and follow. It's not enough to simply know the cap rate. Multiple other investment property metrics exist.

Gross Yield

The gross yield is the percentage of profit before deducting your expenses. It’s a key metric used to evaluate the profitability of an investment property. To calculate gross rental yield, divide the income generated from the property by the property value.

For example, let’s say that your rental property has a gross rent of $12,000 per year and the market value of the home is $200,000. To calculate the gross rental yield:

• $12,000 (gross annual rent) / $200,000 (property’s market value) = 0.06, or 6%

Gross yields can fluctuate over time, and like with cap rates, a higher gross rental yield isn’t necessarily better. The higher the yield, the greater the risk.

Gross Income Multiplier

A gross income multiplier is also used to measure an investment property’s value. It's calculated by dividing the sale price of the property by its gross annual rental income. It doesn’t take into account any operating costs.

A low gross income multiplier is preferred because it means that the property’s gross income is significantly higher than its market value.

While it’s beneficial to know the property’s gross income multiplier, it’s important to remember that it doesn’t take into account any operating costs, such as taxes, utilities, maintenance and tenant vacancies.

Net Income Multiplier

Another useful metric for property investment is net income multiplier. It is calculated by dividing the property’s purchase price by its net operating income. Net income multiplier calculates how many times higher the price is compared to its net operating income.

Essentially, it helps you determine the property’s earning capacity at the time of the purchase.

Discount Rate

Cap rate is based on an annual rate. Discount rate varies because it is applied to net cash flows for a series of years. The discount rate often spans over a course of 5 to 10 years. The discount applies to “flows,” or the:

• Net income
• Net operating income minus tenant improvements

Let’s assume that there's a cap rate of 10% on a property and then a risk premium attached. Risk would be the 10-year note, which we’ll state is 2% for educational purposes. Based on this figure, the discount rate would be 10% + 2%, or 12% total.

Investors use this rate to discount cash flow at the end of the year. Discount rates always remain higher than the cap rate itself.

Frequently Asked Questions

Why is Cap Rate So Important?

A cap rate assessment helps ensure that you aren’t saddled with an asset that can’t pay for itself. Price alone isn’t going to determine whether the property is a viable rental. There may be a reason the property has been sitting on the market for six months or more.

Cap rates also help you compare properties. If you have your eye on more than one property, the cap rate may be the ultimate deciding factor in which one you choose.

Additionally, if you plan on financing the property, the cap rate will help you calculate how much time it will take to own the property outright.

What is a Good Cap Rate for a Rental Property?

A cap rate between 4% and 12% is common and considered a good cap rate. With that said, there are a few factors at play here, such as:

• Demand
• Property type
• Available inventory

In other words, whether or not a cap rate is acceptable or even favorable is subjective. In expensive areas with high-cost real estate, such as large metropolitan areas, a cap rate of 4% may be common. In a suburban up-and-coming neighborhood, you may see a cap rate of 10% or even higher.

Understanding the local market is important and will help you set realistic expectations for your cap rate.

Is Cap Rate the Same as ROI?

No. Although both ROI and cap rate use net operating income (NOI) as part of their calculations, they each measure different things.

• ROI calculates how much you will make each year and incorporates mortgage payments into the calculation (cap rate does not).
• Cap rate simply evaluates the profitability of a property compared to the market.

It's important for investors to use both of these metrics to make smarter investing decisions.

Is a Higher Cap Rate Better?

It’s easy to assume that a higher cap rate would be better. After all, it means that you will bring in more money, right?

A higher cap rate isn’t necessarily a good thing. Generally, a lower cap rate means a lower risk and a higher cap rate means a higher risk.

Properties with a higher cap rate may be located in an area where there aren’t many opportunities to raise rent or property appreciation isn’t quite on par with other areas.

Are Mortgage Payments and Taxes Included in the Cap Rate Calculation?

Property tax is included in the cap rate calculation, but income taxes and mortgage payments are not.

Income taxes vary from one owner to the next, so it’s difficult to incorporate this factor into the equation. However, property tax will remain the same no matter what.

Any debt-related expenses, such as mortgage and interest payments, are not a part of the cap rate calculation. Why? Because the calculation focuses on the property itself and not any financing that may be used to obtain it. This is advantageous because it allows you to focus purely on the worth of the property.

What’s the Difference Between Cap Rate and Cash-on-Cash?

Real estate analysis has a lot of formulas and methods that can be used to value an investment. The cap rate formula has been discussed at great length, but the cash-on-cash return is another method that you’ll come across.

Cash flow, or the cash on cash return, on the cash that’s been invested on a property.

Using the figures in a previous example, let’s assume that an investor puts 20% down on the $200,000 home purchase, or $40,000.

The cash on cash would be your return on the $40,000 put down on the property. If the home has a net operating income of $20,000. In this case, we can use the follow formula to determine the cash on cash return: net operating income / total cash investment, or ($20,000 / $40,000) * 100, which equals 50%.

The cash on cash return of 50% is great, and this is a good method of determining if an investment is performing well.

Cash flow distributions can be based on this figure, and it’s a figure that is most commonly used in commercial real estate.

When you calculate cash on cash, it’s important to add in financing and mortgage costs as expenses. Both of these expenses are not listed when computing cap rates.

How Do Interest Rates Affect Cap Rates?

Interest rates do affect cap rates. When most people think of interest rates, they automatically think of mortgage rates. While mortgage interest rates are important, interest rates impact the price of a property regardless of mortgages.

Higher interest rates generally lead to higher cap rates and vice versa. It’s not always the case, but cap rates and interest tend to move directionally together.

When interest rates are low, money is “cheaper,” which means there is higher demand for supply. Investors, in this case, are willing to accept a lower return, and this compresses cap rates. When interest rates rise, money becomes more expensive and investors are less willing to accept a lower return. This can lead to higher cap rates.

While cap rates usually move with interest rates, they don’t necessarily have to. There are cases where cap rates stay the same despite interest rate hikes. In these cases, demand proved to be a stronger counterbalance.

Investors that want a fast and simple way to calculate cap rate and analyze rental properties can use our rental property calculator. Free and easy to use, simply download the extension and go the desired real estate portal to have the cap rate and other metrics filled in automatically.

Using a cap rate allows investors to know how much return their investment will yield on an annual basis.