Calculate a rental property's monthly cash flow, cap rate and cash-on-cash return from its purchase price, rent and expenses.
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Cap rate (capitalization rate) measures a property's return as if bought entirely in cash: annual Net Operating Income ÷ purchase price, ignoring financing. Cash-on-cash return instead measures the return on the actual cash you invested (your down payment): annual cash flow after the mortgage payment ÷ down payment. The two can differ significantly on a leveraged purchase.
Net Operating Income (NOI) is rental income minus operating expenses, before the mortgage payment. Cash flow subtracts the mortgage payment too, showing what's actually left in your pocket each month.
Operating expenses typically include property tax, insurance, maintenance and repairs, property management fees, and a vacancy allowance, but exclude the mortgage payment itself, which is entered separately.
It varies by market, but 4-10% is a common general range, lower in expensive, low-risk markets and higher in markets with more risk or lower property prices. Compare against similar properties in the same area.
When you finance part of the purchase with a mortgage at a lower rate than the property's cap rate, leverage amplifies your return on the cash you actually put in, this is often called 'positive leverage.'
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