Rental Property Calculator: Analyze Investment Potential

How to Calculate Rental Property ROI

Understanding how to calculate the return on investment (ROI) for a rental property is crucial for making informed real estate investment decisions. This guide will walk you through the process of analyzing a rental property's potential profitability.

Key Formulas

The main formulas used in rental property analysis are:

1. Monthly Mortgage Payment:

   $$P = L \frac{r(1+r)^n}{(1+r)^n-1}$$

   Where:

   • $$P$$ is the monthly mortgage payment
   • $$L$$ is the loan amount
   • $$r$$ is the monthly interest rate (annual rate divided by 12)
   • $$n$$ is the total number of monthly payments

2. Annual Cash Flow:

   $$AnnualCashFlow = AnnualRent - AnnualMortgagePayment - AnnualExpenses$$

3. Cash-on-Cash Return:

   $$CashOnCashReturn = \frac{AnnualCashFlow}{DownPayment} \times 100\%$$

4. Cap Rate:

   $$CapRate = \frac{AnnualRent - AnnualExpenses}{PurchasePrice} \times 100\%$$

Calculation Steps

1. Calculate the monthly mortgage payment using the loan amount, interest rate, and loan term
2. Determine the annual cash flow by subtracting annual mortgage payments and expenses from annual rental income
3. Calculate the cash-on-cash return by dividing annual cash flow by the down payment
4. Compute the cap rate by dividing net operating income (annual rent minus expenses) by the purchase price
5. Analyze the results to assess the property's potential profitability

Example Calculation

Let's analyze a rental property with the following details:

• Purchase Price: $300,000
• Down Payment: $60,000 (20%)
• Interest Rate: 4%
• Loan Term: 30 years
• Monthly Rent: $2,000
• Annual Expenses: $5,000

Step 1: Calculate Monthly Mortgage Payment

$$L = $300,000 - $60,000 = $240,000$$

$$r = 4\% \div 12 = 0.0033333$$

$$n = 30 \times 12 = 360$$

$$P = 240,000 \times \frac{0.0033333(1+0.0033333)^{360}}{(1+0.0033333)^{360}-1} = $1,145.80$$

Step 2: Calculate Annual Cash Flow

$$AnnualCashFlow = (2,000 \times 12) - (1,145.80 \times 12) - 5,000 = $5,250.40$$

Step 3: Calculate Cash-on-Cash Return

$$CashOnCashReturn = \frac{5,250.40}{60,000} \times 100\% = 8.75\%$$

Step 4: Calculate Cap Rate

$$CapRate = \frac{(2,000 \times 12) - 5,000}{300,000} \times 100\% = 6.33\%$$

Visual Representation

This bar chart illustrates the components of the annual rental property cash flow, including rental income, mortgage payments, expenses, and the resulting cash flow.