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Cap Rate
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Monthly Cash Flow
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Cash-on-Cash Return
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Calculate cap rate, monthly cash flow, and cash-on-cash return for a rental property investment.
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Monthly Cash Flow
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Cash-on-Cash Return
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Subtract annual operating expenses from annual rental income to get Net Operating Income (NOI), then divide by the property's purchase price. This gives the capitalization rate, a financing-independent measure of return.
Cap Rate = Net Operating Income ÷ Purchase Price × 100
Capitalization rate (cap rate) measures a property's return based purely on its Net Operating Income relative to its purchase price, deliberately ignoring how the purchase is financed. This makes cap rate useful for comparing properties on an apples-to-apples basis, since it isolates the property's own performance from an investor's specific loan terms or down payment size.
Cash-on-cash return instead measures annual pre-tax cash flow relative to the actual cash invested (down payment plus closing costs), capturing the effect of leverage. Using a mortgage to buy a property with a smaller down payment can significantly amplify (or reduce) cash-on-cash return compared to cap rate, since the same NOI is measured against a much smaller cash investment.
Operating expenses should include property taxes, insurance, ongoing maintenance and repairs, property management fees, and a vacancy allowance (an estimate for months the unit sits empty between tenants), but should not include mortgage principal and interest, since NOI and cap rate are meant to measure the property's performance before financing costs.
Monthly cash flow, rent minus both operating expenses and the mortgage payment, is the number that actually determines whether a property is putting money in your pocket each month or requiring you to subsidize it. A property can have an attractive cap rate on paper while still being cash-flow negative once financing costs are included, particularly with a small down payment or a high interest rate.
Cap rates vary significantly by market and property type, but 4-10% is a common range, with higher cap rates typically indicating higher risk or lower-growth areas, and lower cap rates indicating premium, stable markets. Compare cap rates within the same local market rather than against a universal benchmark.
Cap rate measures return based on the total property value, ignoring financing, useful for comparing properties on an all-cash basis. Cash-on-cash return measures return based only on the actual cash you invested (down payment plus closing costs), reflecting the impact of leverage.
Operating expenses typically include property taxes, insurance, maintenance and repairs, property management fees, and vacancy allowance, but exclude mortgage principal and interest payments, which are financing costs, not operating costs.
Check mortgage payments with the Mortgage Calculator, or evaluate lease vs buy decisions with the Lease vs Buy Calculator.
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