How the rental cash flow calculator works
A rental is worth holding when the rent, after vacancy and running costs, covers the mortgage with money to spare. This calculator gives the four numbers investors and lenders look at: monthly cash flow, cap rate, cash-on-cash return and debt service coverage.
The formulas
- Effective rent = rent × (1 − vacancy %)
- Net operating income (NOI) = (effective rent − operating expenses) × 12. The mortgage is not an operating expense.
- Cap rate = NOI ÷ purchase price
- Monthly cash flow = effective rent − operating expenses − mortgage payment
- Cash-on-cash return = yearly cash flow ÷ (down payment + closing costs)
- Debt service coverage (DSCR) = NOI ÷ yearly mortgage payments. Lenders usually want 1.2 or more.
Worked example
A $400,000 property with 20% down ($80,000) and $8,000 closing costs needs $88,000 of cash. The $320,000 loan at 6% over 30 years (monthly compounding) costs $1,918.56 a month.
Rent of $3,000 with 5% vacancy and $700 of expenses gives an NOI of $25,800 a year: a 6.5% cap rate. After the mortgage, cash flow is $231 a month. DSCR is 1.12.
What to watch
- Use the rent the property can get today, from comparable listings, not the seller's projection.
- A small negative cash flow can still make sense if you are paying down principal and expect appreciation, but know that you are betting on it.