Evaluating a Real Estate Investment

Buying a rental property is a major financial decision. Unlike buying a personal home an investment property must be evaluated based on its ability to generate profit. This calculator helps you analyze the key financial metrics that experienced investors use to determine if a property is a worthwhile investment.

How to Use This Calculator

To analyze a property provide details about the purchase, your loan, and the ongoing income and expenses. The calculator will then compute four essential metrics for you.

Understanding Key Investment Metrics

Here is a breakdown of the results and what they mean for your investment:

• Net Operating Income (NOI): This is your total annual income from rent minus all of your operating expenses. Operating expenses include things like taxes, insurance, and maintenance. NOI does not include your mortgage payment. It is a measure of the property's profitability before financing.
• Capitalization Rate (Cap Rate): Calculated as NOI divided by the property's purchase price. The Cap Rate represents the rate of return on the investment if you had paid for it entirely in cash. It is a useful way to compare the relative value of different properties regardless of how they are financed.
• Annual Cash Flow: This is the money left in your pocket after all expenses and your mortgage payment have been paid. It is calculated by subtracting your annual mortgage payments from your NOI. A positive cash flow means the property is generating more income than it costs to own each year.
• Cash on Cash Return (CoC): This metric measures the annual return you get on the actual cash you invested. It is calculated by dividing your annual cash flow by your total cash invested (down payment plus closing costs). This is often considered the most important metric because it tells you how well your own money is performing.

Estimating Expenses

Accurately estimating expenses is a very important part of investment analysis. While some costs like taxes are easy to find others require estimation. For maintenance many investors use the "1% Rule" which suggests budgeting 1% of the property's value for annual maintenance. Others use 5 to 10 percent of the monthly rent. For property management fees a typical rate is 8 to 12 percent of the monthly rent. It is better to be conservative and slightly overestimate your expenses to ensure your projections are realistic.

Disclaimer: This calculator is for informational and educational purposes. Real estate investing involves risks and market conditions can change. The results are estimates and not a guarantee of performance. Always conduct thorough due diligence and consult with financial and real estate professionals.