Before jumping into real estate investing or making a new purchase, it is important to understand how to calculate metrics that will help you make the best decisions. Particularly for beginner real estate investors, using rental property calculators can be extremely valuable. These calculators can also help analyze the health of your existing properties.
If you are considering a real estate purchase, Capitalization Rate (Cap Rate), Net Operating Income (NOI), and Gross Rent Multiplier (GRM) will help you determine whether or not the investment is a smart choice. An Internal Rate of Return (IRR) calculation will estimate when and how much income a property is likely to earn you. Projecting Return on Investment (ROI) can help tell you how much increase in wealth an investment is likely to bring you.
If you already own and operate an investment property, Cash-on-Cash (CoC), Operating Expense Ratio (OER), and Return on Investment (ROI) are great tools to help measure how well your properties are making you money.
To further explain, the rental property calculators we’ll be exploring are:
- Net Operating Income (NOI)
- Capitalization Rate (Cap Rate)
- Gross Rent Multiplier (GRM)
- Cash-On-Cash (CoC) Return
- Debt Service Coverage Ratio (DSCR)
- Operating Expense Ratio (OER)
- Return on Investment (ROI)
- Internal Rate of Return (IRR)
What is Net Operating Income (NOI)?
In short, Net Operating Income (NOI) is an important indicator in determining the profitability of a potential real estate investment. Essentially, it calculates the revenue generated from a property after subtracting your Operating Expenses (e.g. maintenance, insurance, property taxes, utilities, etc).
What is NOI Used for?
Calculating NOI will allow you to find how much money a property earns after accounting for all of the Operating Expenses. Take note, however, NOI does not factor in the cost of your mortgage. Determining the NOI of a property helps you decide if the profit made from the investment makes the purchase worthwhile.
What Information Will I Need to Calculate NOI?
- Gross Operating Income
- Operating Expenses
To determine NOI, firstly you will need to calculate all of the income a property generates (i.e. Gross Operating Income). You will also need to calculate the ‘Operating Expenses’ you may incur, such as:
- Pest control costs;
- Insurance fees;
- Maintenance and repair costs;
- Lost income due to vacancy;
- Property management costs;
- Tenant screening fees; and,
- Property taxes.
Because mortgages vary between investments, your NOI calculations should not include your mortgage. By leaving these out of your calculations, you can eliminate factors that differ from property to property and obtain more accurate data for comparing potential rental investments on a head-to-head basis.
However, keep in mind that NOI is not the same thing as Net Cash Flow (NCF). NCF is the difference between your property’s cash inflows (what comes in) and outflows (what goes out) over a certain period of time. Generally, NCF = NOI – mortgage payments.
How to Calculate NOI
Once you’ve calculated the ‘Gross Operating Income’ and ‘Operating Costs’, you will be able to subtract the running costs (i.e. ‘Operating Expenses’) from the yearly rental income earned (i.e. Gross Operating Income). Use our simple net operating income rental property calculators or follow the formula below:
Gross Operating Income – Operating Expenses = Net Operating Income
What is Capitalization Rate (Cap Rate)?
The Capitalization Rate, or Cap Rate, is a ratio of the potential income of a rental to the property’s purchase cost. In other words, Cap Rate is a quick estimate of the rate of return on a rental property. It is arguably the most-used of the rental property calculators when purchasing property.
What is Cap Rate Used For?
Cap Rate is useful in analyzing the asking price of a property when you’re considering a purchase. If the ratio of income to asking price for a property does not compare favorably against other similar properties in the area, based on the potential income, you might have some leverage to negotiate a better price.
While less common, owners sometimes calculate Cap Rate on their existing investments. Given the current market value, if a property is providing a lower Cap Rate than its market comparisons, you may need to lower costs and improve the effectiveness of management.
What Information Will I Need to Calculate Cap Rate?
- Net Operating Income
- The Current Market Value of the Property (Or, asking price, if you’re purchasing)
To begin Cap Rate calculations, you will need to calculate (or estimate) ‘Net Operating Income’ (NOI), which we have covered above. You will also need to know the ‘Current Market Value’ of the property.
How to Calculate Cap Rate?
To calculate the Cap Rate of a rental property, you divide the ‘Net Operating Income’ (NOI) by the current market value of the property or the price you would pay to purchase the property. Click here to use our simple rental property calculators or follow the formula below:
Net Operating Income / Property Current Market Value = Cap Rate
Overall, calculating Cap Rate is a great way to perform a quick analysis on a potential property, however, a more in-depth analysis with several other real estate investing calculators is necessary before you make a purchase.
What is Gross Rent Multiplier (GRM)?
Gross Rent Multiplier (GRM) provides a very simplistic look into the long term payoff of a property, therefore helping to determine whether or not it is a good buy. Thus, GRM simply determines how long it would take to pay off the property’s sale price using just rental income over a period of time.
What is GRM Used For?
GRM is a quick and easy tool to compare the potential profitability of multiple similar properties when making your purchasing decision, by ranking your potential purchases based on asking price vs rental income.
What Information Will I Need to Calculate GRM?
- Property Asking Price
- Gross Annual Rental Income
To find the GRM of an investment property, you will need the purchase price of the property and the total expected income (all sources, not just rent) over the course of one year.
How to Calculate GRM?
You need to divide the purchase price by the income you expect to receive over the course of one year. Use the current rental rate of the property you wish to purchase or complete a rental analysis with nearby comparable properties. In some cases, it makes sense to use “Pro Forma” numbers, which are a projection of the rental income if a buyer can increase income and/or reduce expenses. Click here to use our simple rental property calculators or follow the formula below:
Property Purchase Price / Gross Annual Rental Income = Gross Rent Multiplier (GRM)
You must remember that this ratio does not factor in elements such as depreciation, property taxes, insurance, or repairs. In fact, all expenses are left out of this equation. GRM is a simplified way to estimate the rate of return on a property and make an educated decision about whether to further explore making the purchase.
Before deciding to buy a rental we strongly suggest digging deeper by running some OR ALL of the other calculations using the applicable rental property calculator.
What is Cash-On-Cash (CoC) Return?
Seasoned real estate investors often use the Cash-on-Cash (CoC) return metric, which compares the cash earned by a property to the cash invested. That is, it tells you how much money you get to take home per dollar you’ve put into an investment. We believe it is valuable to forecast this calculation when you’re considering a purchase, and also as a metric to track year-over-year after you own a property. Your cash is valuable and, for most people scarce, which makes CoC one of the best rental property calculators for evaluating the strength of your investments.
What is CoC Used For?
You can use CoC Return to analyze multiple properties to determine which one has the highest potential cash return. To put it another way, CoC measures a property’s profitability, telling how much each of the dollars invested will earn you. It factors in ALL inflows and outflows associated with operating a rental property.
When you’re considering a purchase you can compare properties and explore different scenarios to determine which will give you the best rate of return on your cash, how much money to borrow, and what sorts of improvements to make.
What Information Will I Need to Calculate CoC?
- Annual Pre-Tax Cash Flow
- Total Cash Invested
To be able to calculate CoC, you first need to calculate the Net Cash Flow (NCF) of the property. It’s easy to confuse NCF and NOI; however, generally NCF = NOI – Mortgage Payments. We’ve explored calculating NOI above.
You will also need to calculate the Total Cash Invested in the property. The Total Cash Invested includes all of the money put into the investment, in particular the down payment, closing costs, up-front repairs or improvements, and financing fees.
How to Calculate CoC Return?
You can calculate CoC Return by dividing the Net Cash Flow of a property by the Total Cash Invested. Firstly, to find your Net Cash Flow, you will take all of your generated income (inflows) and subtract all of your expenses (outflows). Click here to use our simple CoC rental property calculators or follow the formula below:
Annual Pre-Tax Cash Flow / Total Cash Invested = CoC Return
CoC vs ROI: What’s the Difference?
At first glance, CoC and ROI can seem like the same thing.
CoC gives you the cash you take home over a period of time, as a percentage of the cash you’ve invested. We believe CoC is best used when you’re holding a property long-term. Usually, run yearly, it tells you how much each of the dollars (your OWN cash!) you initially invested is earning you. Comparing this metric year-to-year lets you track the trends in your property’s performance.
We believe the best use of ROI is as a snapshot of your total gain in wealth if you sold your property, as a percentage of the cash you have put into it. It factors in appreciation, principal paid-down, and tax advantages of real estate ownership. Projecting ROI can also suggest whether it makes sense to purchase a rental if you plan to sell within a few years.
What is Debt Service Coverage Ratio (DSCR)?
When analyzing the size of a loan to take out for an investment property, the Debt Service Coverage Ratio (DSCR) can help you make an informed decision as it analyzes your ability to make the payments.
What is DSCR Used For?
To ensure a mortgage can be supported by the cash flow of a property, DSCR compares the annual Net Operating Income (NOI) to the annual mortgage debt payments.
What Information Will I Need to Calculate DSCR?
- Net Operating Income (NOI)
- Annual Debt Service
Firstly, you determine the Net Operating Income (gross rental income minus operating costs) of a property which can be calculated using an investment property calculator like our NOI Calculator. From there, you need to determine the ‘Annual Debt Service’, which is the principal and interest amount of a mortgage that is required to be paid over the course of one year.
How to Calculate DSCR?
To calculate DSCR, divide the NOI by the Annual Debt Service to calculate the Debt Service Coverage Ratio. Click here to use our simple rental property calculators or follow the formula below:
Net Operating Income / Annual Debt Service = DSCR
Often your mortgage lender will analyze the Debt Service Coverage Ratio of an investment property that you plan to purchase before approving your loan. For this reason, this helps them verify that you’ll be able to make your mortgage payments. You can also use DSCR to determine the down payment amount that makes sense for your investment property mortgage.
What is Operating Expense Ratio (OER)?
The Operating Expense Ratio (OER) measures the cost to operate a property versus the income it generates. By dividing your operating expenses by your property’s operating income you will determine your OER.
What is OER Used For?
OER compares what it costs to operate a property with the income that it generates to help you ensure you are running your rental – IE your business – efficiently. When property expenses are being well managed OER will either stay the same or decrease over time, which will allow you to welcome more income.
What Information Will I Need to Calculate OER?
- Operating Expenses (Less Depreciation)
- Gross Revenue
You will need to calculate the Operating Expenses of your property. Your Operating Expenses include the daily running costs less the amount the property is depreciating annually. Please see our section on NOI for examples of operating expenses. Similarly, as with NOI, vacancy costs are included when calculating Operating Expenses. From there, calculate the Gross Revenue, the total of all rent and other income earned.
How to Calculate OER?
To find out the OER, you need to divide the Operating Expenses of a property by the Gross Revenue. To put it another way, it demonstrates how much of the rental income will be used on Operating Expenses. Click here to use our simple rental property calculators or follow the formula below:
(Operating Expenses – Depreciation) / Gross Revenue = OER
However, the Operating Expense Ratio calculation does not include debt in its calculations, which can make the findings a little misleading. OER is a measurement of operational efficiency, not of profitability. You may also want to use additional calculations, such as CoC and ROI, which include mortgage costs when you’re analyzing the performance of rental investments.
What is Return on Investment (ROI)?
Return on Investment is an accounting measurement used in purchases across almost every economic sector. It measures how much profit is made on a property as a percentage of the money invested.
What is ROI Used For?
When discussing various investments, ROI is a commonly used term. The easiest understanding is that ROI is a measure of overall wealth gained, however, real estate investment involves many variables. ROI is interpreted differently depending on the application and who you’re talking to. Given the complexity of purchasing and operating rental property, and the various inputs one can choose to include, we don’t believe ROI is actually a very objective calculation; CoC and IRR are better measures of the performance of your investment.
Landlord Gurus Take on ROI:
The way we think about ROI is that it just gives you a snapshot of how much money you’d gain on your purchase cost, which we believe is only meaningful if you intend to sell. It is also highly subjective depending on the period of time you’ve owned an asset: investing $1000 and gaining $200 is far better over one year than ten. One nice element of ROI, however, is that it shows you how much wealth you’re building as you pay down debt.
As with many of these calculations, calculating ROI is most valuable as a comparison tool. How well is my real estate performing versus stocks or other investments? How is my property doing this year vs last year?
Investopedia has a great article if you want to learn more.
What Information Will I Need to Calculate ROI?
- Gain on Investment
- Cost of Investment (original purchase price, including all transaction costs)
Keep in mind that the Gain on Investment will include all income & operating costs, appreciation, as well as tax and mortgage expenses, if any.
How to Calculate ROI?
When calculating ROI it will differ significantly depending on the property and funding methods. Here are a couple of examples. Click here to use our simple rental property calculators. Let’s assume each of these scenarios is over a one year period:
Stocks: I bought a stock for $100, I sold it for $120 one year later, I gained $20 on my $100 investment, my ROI is gain/cost giving me 20%.
Gain / cost = ROI
$20 / $100 = 20%
Real estate purchased with cash: I buy a rental house for $102,000 ($100,000 asking price plus $2000 in transaction costs), I earn $5500 after all expenses (NOI), and I sell for $112,000 after one year. My gain is $15,500 so my ROI is 15.2%.
(NOI + appreciation) / cost = ROI
$5500 + $10,000 / $102,000 = 15.2%
Real estate purchased with financing: I buy the same $100,000 house using $23,500 of my cash for the down payment and closing costs, I earn $5500 in NOI, I pay $4800 in mortgage payments, I pay down $300 in principal, and I sell for $110,000. My gain is $11,000, giving me an ROI of 47%.
(NOI – mortgage payments + principal paid down + appreciation) / cash cost = ROI
$5500 – $4800 + $300 + $10,000 / $23,500 = 47%
Internal Rate of Return (IRR)
What is Internal Rate of Return (IRR)?
Internal Rate of Return will help estimate when and how much income you’ll see on a given property. Earning a higher income early is better than waiting for returns down the road!
What is IRR Used For?
Expressed as a percentage, IRR takes into account when inflows and outflows take place. Unlike other calculations, IRR takes into consideration the effect of compounding interest. Thus, returns generated earlier in the life of the investment have a greater impact on IRR than returns that come later in the investment: “a dollar today is worth more than a dollar tomorrow”. The income you receive from rent and other sources will earn interest and compound over the course of ownership.
What Information Will I Need to Calculate IRR?
- Net Present Value (NPV)
Calculating IRR is difficult when using a manual formula as opposed to a pre-formatted calculator. You need to work out the Net Present Value (NPV), which deducts the current value of the expected future cash flows from the current value of cash invested.
How to Calculate IRR?
To find out the IRR, you will need to determine the Net Present Value (NPV) of the property along with other variables. However, due to the complex nature of calculating IRR, we suggest you use a great rental property calculator like this investment property calculator.
Landlord Gurus Takeaway: Calculator Recap
Real estate property calculators can help you obtain a better understanding of your real estate business whether you’re new to property investing or a seasoned professional. Here’s a quick recap of the investment property calculator tools we’ve discussed, and how you can use them:
If you are considering a real estate purchase:
Capitalization Rate: Cap Rate measures the rate of return on a rental property.
Net Operating Income: NOI is the yearly income earned after all expenses other than mortgage payments.
Gross Rent Multiplier: GRM is a quick tool that’s usually used to compare multiple properties at a glance. It is a ratio of gross rents to purchase price, however, it doesn’t take into consideration differences in expenses, taxes, etc, that are required when actually financing and running a property.
Debt Service Coverage Ratio: DSCR tells you how much cash flow from a rental property is sufficient to cover debt payments.
Internal Rate of Return: IRR takes into account not just the amount of income earned, but specifically when the income is earned. So two investments might have same exact nominal return and same ROI, but the one that pays earlier has a better IRR than the other and is considered more valuable.
If you already own and operate an investment property:
Cash-on-Cash: CoC is a measure of yearly earnings as a percentage of the initial money invested. It does not account for appreciation, tax savings, or other factors in real estate investment. ROI is the tool to use if you want to incorporate those numbers.
Operating Expense Ratio: OER measures operating expenses as a percentage of gross revenue, which is an indicator of efficiency. The lower the OER the better. Tracking this ratio over time tells you whether a property’s performance is improving or not.
Return On Investment: ROI is a comprehensive analysis of an investment’s return, accounting for all income & expenses, taxes, mortgage costs, and appreciation. It is the best measurement of how much you are earning on a property, as a percentage of the total initial acquisition cost. It is NOT a measurement of profit as a percentage of cash invested – that’s CoC.
If you come up with additional questions, please let us know in the comments and we’ll certainly do our best to help!
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