Cap Rate Calculator

Investors in rental property ask two separate questions. First, how good is the property itself as an earner? Second, given the way I will finance it, how much cash will I really take home? The first is answered by the capitalisation rate, and the second by cash flow and cash-on-cash return. This calculator gives all of them from one set of inputs, so you can see how the loan changes the picture.

Net operating income

Start with the rent if the property is let all year. Take off the share lost to vacancy to get the rent collected. Then subtract the costs of running the property: property tax, insurance, maintenance and repairs, and a management fee as a percentage of the rent you collect. What remains is net operating income, NOI. It deliberately ignores the mortgage, your income tax and depreciation, so that it describes the property, not you.

A worked example

The sample is a flat bought for 1,00,00,000 with a rent of 55,000 a month, 5% vacancy, property tax of 40,000, insurance of 12,000, maintenance of 60,000 and a management fee of 8%. Rent collected is 6,27,000, costs are 1,62,160 and NOI is 4,64,840, a cap rate of 4.65% and a gross rent multiplier of 15.2. With 30% down at 9% over 20 years, the loan payments are 7,55,770 a year, so the cash flow is −2,90,930 (−24,244 a month), and with 36,00,000 put in (down payment and 6% buying costs) the cash-on-cash return is −8.08%. The debt service coverage ratio is 0.62.

Why the cash flow is negative

The cap rate of 4.65% is below the loan rate of 9%. When money costs more than the property earns, borrowing makes the return worse. This is called negative leverage, and the page warns when the cash flow after loan payments is negative. A buyer in this position is relying on rent growth and price appreciation to make the investment work, which are uncertain. The US-style sample, with a cap rate of 5.41%, a loan at 6.8% and a coverage ratio of 0.92, shows a smaller shortfall of 1,469 a year.

Cash-on-cash return

Cash-on-cash return divides the yearly cash flow by the cash you invested, the down payment plus buying costs. It answers the question of what your own money earns each year, ignoring growth in value and the gradual repayment of principal. Lenders and investors like to see a positive figure that exceeds what the same cash would earn in a deposit. Because the figure ignores appreciation, it understates the return on a property that rises in price.

Debt service coverage

The ratio of NOI to yearly loan payments tells you how much room there is. A figure of 1.0 means the rent after costs just pays the loan; many lenders look for a margin, often 1.2 or more. A figure under 1.0, like the sample’s 0.62, means the owner must top up the payments from other income. Raise the down payment or lower the rate in the page to see how much it takes to get above 1.

Limits

Rents, vacancy and costs are constants for a single year; real properties have repairs that arrive in lumps, tenants who leave and rents that change. Income tax, depreciation, capital improvements and the sale price are not included. Cap rates differ by city and property type, so compare with similar properties in the same area.

Related tools

• Rental Yield Calculator gives a simpler gross and net yield without any loan.
• Rent vs Buy Calculator looks at a home you would live in instead of let.
• Mortgage Calculator shows the full loan schedule behind the yearly payment.
• ROI Calculator states total gain on the money invested as a percentage.