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Will this rental earn money after every cost?
-$442
This week: replace the sample rent and mortgage with numbers from a listing you are actually considering.
Written by Elizabeth Stein
Take the calculator's own starting numbers: a $350,000 property renting for $2,800 a month plus $150 in parking and storage, a 6% vacancy assumption, $1,415 a month in combined operating expenses, and a $1,800 mortgage payment. Effective gross income comes to $2,773. Net operating income is $1,358, which annualizes to a 4.66% cap rate. Cap rates vary by market, so that figure alone tells you little. But subtract the $1,800 mortgage from that $1,358 and the property runs a negative $442 a month in actual cash flow, before anything unexpected happens.
Finance Quest is educational. It is not financial advice, and no calculator here knows your full situation.
Cap rate is a useful way to compare properties at different prices, because it strips out how each one is financed. But it says nothing about whether the mortgage payment on this specific loan leaves you with cash left over every month. Two properties with the same cap rate can have completely different monthly cash flow depending on the down payment and interest rate. Look at both numbers together, and if a deal shows negative cash flow, ask what happens the first month a tenant is late or an appliance breaks.
It depends heavily on the market. Cap rates differ by market and property type, so compare a property's cap rate with similar nearby sales, not with a single national number.
Not automatically, some investors accept a modest negative cash flow in a fast-appreciating market and plan to make it back on the sale. But that's a bet, not a return you can count on. If the plan only works because the property appreciates, it depends on price growth, so judge it as a bet on prices, not as rental income.
Regular maintenance is the recurring small stuff: a service call, a filter, a patch job. A capital expenditure is a big infrequent replacement, a roof, a furnace, an entire kitchen. This calculator asks for a monthly capital expenditure figure, meant to be a reserve you set aside every month so the big bill doesn't blindside your cash flow when it eventually arrives.
Cap rate measures the property's return as if you bought it in cash. Cash-on-cash return measures the return on the actual money you put in, down payment, closing costs, and repairs, with the mortgage payment already subtracted. A leveraged property (a big loan, a small down payment) can post a much higher cash-on-cash return than its cap rate, or a much lower one if the cash flow is thin.