Rental Property Calculator

Two investors can look at the identical rental property and reach different conclusions about its return, simply because one is looking at cap rate and the other at cash-on-cash return — two genuinely different measures that answer different questions. This calculator computes both, along with net operating income, so you can see exactly what each one actually tells you.

How the Rental Property Calculator Works

Enter the purchase price, expected monthly rental income, operating expenses (property tax, insurance, maintenance, management fees), vacancy rate, down payment, and mortgage terms, and the calculator computes Net Operating Income (NOI), cap rate, and cash-on-cash return, giving a multi-angle view of the property’s expected financial performance.

Net Operating Income: The Foundation Both Return Measures Build On

NOI is calculated as total rental income (adjusted for expected vacancy) minus operating expenses — importantly, excluding mortgage payments, since NOI is specifically designed to measure a property’s income-generating performance independent of how it happens to be financed. This exclusion is deliberate and important: NOI answers “how much income does this property itself generate,” a question that should have the same answer regardless of whether the property is financed with a large mortgage, a small mortgage, or paid entirely in cash.

Cap Rate: The Property’s Return Ignoring Financing Entirely

Cap rate is calculated as NOI divided by the property’s purchase price (or current market value), expressed as a percentage — and because it’s built directly on NOI, it deliberately ignores financing entirely, representing the return the property itself would generate if purchased with cash. This makes cap rate genuinely useful for comparing different properties against each other on a standardized, financing-independent basis, since two properties with identical cap rates generate comparable income relative to their price, regardless of how either investor actually plans to finance their specific purchase.

Cash-on-Cash Return: The Return on Your Actual Cash Invested

Cash-on-cash return instead measures annual cash flow (NOI minus mortgage payments) divided by the actual cash you invested (your down payment plus closing costs) — a genuinely different question than cap rate, specifically incorporating the effect of financing (leverage) on your actual out-of-pocket return. Because this measure divides by your actual cash invested rather than the full purchase price, using a smaller down payment (more leverage) on the identical property can meaningfully increase your cash-on-cash return, even though it doesn’t change the property’s underlying cap rate at all, since cap rate never considers financing in the first place.

Why the Two Measures Can Diverge So Dramatically

Because leverage amplifies both potential returns and potential risk, a heavily leveraged property (small down payment, large mortgage) can show a dramatically higher cash-on-cash return than its cap rate alone would suggest — the mortgage lets you control the full property and its full income stream while only committing a fraction of the purchase price in actual cash, and if the property’s income comfortably exceeds the mortgage payment, that difference flows through to a proportionally larger return on your smaller cash investment. The flip side of this leverage amplification is genuine additional risk: a property that can’t cover its mortgage payment during a vacancy or an unexpected expense creates real financial strain specifically because of that same leverage, which is exactly why cash-on-cash return should be evaluated alongside, not instead of, an honest look at the property’s ability to comfortably cover its debt obligations.

Why Vacancy Rate Assumptions Genuinely Matter

This calculator’s vacancy rate input reduces expected rental income to reflect realistic periods when the property sits unrented between tenants — an assumption that’s easy to set optimistically low but that genuinely affects both NOI and every measure built on top of it. Using an unrealistically low vacancy assumption produces an inflated NOI, cap rate, and cash-on-cash return that won’t hold up against actual real-world rental performance, which is exactly why a conservative, realistic vacancy assumption based on your specific local rental market matters more than it might initially seem for an accurate projection.

The Mortgage Payment Feeding Into Cash-on-Cash Return

This calculator’s cash-on-cash figure relies on an accurate mortgage payment calculation as one of its core inputs. The Mortgage Calculator covers that underlying payment calculation directly, including PMI considerations relevant if your rental property purchase involves a smaller down payment.

Comparing a Rental Property Purchase Against Renting Out Your Own Home

If you’re specifically weighing keeping your current home as a rental property against selling it, the underlying rent-versus-cost comparison shares some conceptual overlap with the Rent vs. Buy Calculator on this site, though that tool is framed around a personal housing decision rather than an investment property analysis specifically.

Down Payment Sizing and Its Effect on Leverage

Since down payment size directly drives the leverage effect behind cash-on-cash return, the Down Payment Calculator covers related considerations around down payment sizing, including PMI thresholds, worth reviewing alongside this calculator’s leverage-sensitive cash-on-cash figure.

Frequently Asked Questions

What is the difference between cap rate and cash-on-cash return?

Cap rate divides NOI by the property’s purchase price, ignoring financing entirely. Cash-on-cash return divides cash flow after mortgage payments by your actual cash invested, directly incorporating the effect of leverage. They answer genuinely different questions and can produce very different figures for the identical property.

Why does NOI exclude mortgage payments?

Because NOI is designed to measure a property’s income-generating performance independent of how it’s financed, allowing fair comparison between properties regardless of whether each is financed with a large mortgage, a small mortgage, or purchased entirely in cash.

Why can a smaller down payment increase cash-on-cash return?

Because cash-on-cash return divides by your actual cash invested, not the full purchase price. A smaller down payment means less cash invested, which can produce a proportionally higher return if the property’s income comfortably covers the resulting larger mortgage payment — though this also increases financial risk through greater leverage.

Why does vacancy rate assumption matter so much?

Because it directly reduces expected rental income, which flows through to NOI and every measure built on top of it. An unrealistically low vacancy assumption inflates all resulting return figures beyond what real-world rental performance would actually deliver.

Which measure should I use to compare two different properties?

Cap rate is more useful for comparing properties on a standardized, financing-independent basis. Cash-on-cash return is more relevant for understanding your actual expected return on the specific cash you’d invest, given your specific financing plan for that particular purchase.