Phase 2 · Wealth & Leverage
Rental Cashflow Calculator
A property either pays you every month or quietly bleeds you. Underwrite it like a pro — NOI, cap rate and cash-on-cash, with vacancy and the mortgage included.
How do you calculate rental property cash flow and cap rate?
Work down from gross rent. Subtract vacancy to get effective income, then operating expenses to get NOI. Cap rate = NOI ÷ purchase price measures the property regardless of financing; cash flow = NOI − annual debt service and cash-on-cash = cash flow ÷ cash invested measure your actual deal.
- Worked example (defaults on this page): a $320,000 property renting at $2,900/mo with 6% vacancy and a 38% expense ratio produces $32,712 effective income and $20,281 of NOI — a 6.34% cap rate.
- With 25% down at 6.5% over 30 years, debt service is $18,204/yr, leaving $2,078 of annual cash flow — about $173 a month, or a 2.60% cash-on-cash return on the $80,000 invested.
- Cap rate ignores the mortgage on purpose, so it compares properties. Cash-on-cash includes it, so it compares deals — the same building has one cap rate and countless cash-on-cash returns.
- The 38% expense ratio must cover taxes, insurance, management, maintenance and capital reserves. Underwriting at 10% because "nothing is broken yet" is the single most common way a rental turns out to lose money.
Under the hood
The math, fully exposed
We build income down to cash flow, then express it three ways — no black box:
Effective income = rent × 12 − vacancy
NOI = effective income − operating expenses
Cap rate = NOI ÷ purchase price
Cash flow = NOI − annual debt service (P&I)
Cash-on-cash = annual cash flow ÷ cash invested (down payment)
- Cap rate vs cash-on-cash: cap rate measures the property unleveraged; cash-on-cash measures your return after the mortgage. A great property can be a poor investment if you overpay for the financing.
- Operating expenses are not optional: taxes, insurance, maintenance, capex reserves and management routinely eat 35–50% of income. Under-budgeting here is the classic rookie error.
- Closing costs excluded: cash invested here is the down payment only. Add your closing and rehab costs for an even more conservative cash-on-cash.
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Answers
Frequently asked questions
What is Net Operating Income (NOI)?
NOI is the income a property produces after operating costs but before the mortgage. It's effective rental income (gross rent minus vacancy) minus operating expenses like taxes, insurance, maintenance and management. NOI is the purest measure of a property's earning power because it ignores how you financed it.
What is a cap rate and what counts as good?
Cap rate = NOI ÷ purchase price — the unleveraged yield if you paid all cash. There's no universal "good"; it depends on the market. Pricey, low-risk metros trade at 4–5%; higher-risk or cash-flow markets run 7–9%+. A lower cap rate usually means you're betting on appreciation rather than income.
What is cash-on-cash return?
Cash-on-cash = annual pre-tax cash flow ÷ the actual cash you invested (down payment and costs). Unlike cap rate, it accounts for leverage — your mortgage. It answers the real question: what return is my money earning? Many investors target 8%+, though that's harder to hit when interest rates are high.
Why include vacancy if my unit is already rented?
Because over a holding period tenants leave, units sit empty between leases, and some rent goes uncollected. Underwriting with 0% vacancy is the most common way investors fool themselves into a bad deal. A 5–8% allowance reflects reality and keeps your numbers honest.