Real Estate Deal Analysis & Advice

Rental Property Numbers So Easy You Can Calculate Them on a Napkin (With Real-Life Example!)

Expertise: Business Management, Personal Development, Real Estate Deal Analysis & Advice, Real Estate Investing Basics, Mortgages & Creative Financing, Landlording & Rental Properties, Real Estate News & Commentary
170 Articles Written
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The numbers. In this industry, you must love the numbers. Love them like they are part of you. For good or for bad, ‘til death do you part, never leave the numbers.

One of the biggest questions I’m asked is how I go about evaluating a property once I find it. What do I do, what do I look at, how do I know if it’s “the one”?

There are several things I do and look at with any new potential property, but the most important is the numbers. If the numbers aren’t good, I walk. Save yourself some time, and before you do anything else, run the numbers and see if they work. If they don’t, awesome—you didn’t waste time on other stuff.

What numbers do I run? Well, what should any investor care most about? Cash flow.

What determines cash flow? Income and expenses. Simple.

People make running numbers out to be so complicated sometimes, it's no wonder more people aren't involved in real estate. In reality, the numbers can be one of the easiest parts of shopping for a property. Unless you are a trained psychic on the crystal ball, then predicting appreciation may be easier for you than estimating cash flow.

Ready?

4 Steps to Calculate Your Rental Property Numbers (on a Napkin)

1. Figure out the monthly income (gross income).

This will either be rent the current tenants are paying, the asking rent (confirm this number is realistic), or if you have neither of those, you can talk to a local property manager or real estate agent who can give you a market rent value for the property.

Related: How to Use Price-to-Rent Ratio to Analyze a Location

2. Calculate the monthly expenses.

These include property taxes, insurance, property management fee (if applicable), mortgage or financing (if applicable), homeowner's association fee aka. HOA fees (if applicable), vacancy, and repairs.

Don’t forget vacancy and repairs! They are a real part of any property investment, and they can drastically affect the cash flow. Still, so many people don’t think to include them in the expenses.

  • Property Taxes: Look on Zillow or another online source for the most recent annual tax amount and divide by 12.
  • Insurance: Get a quote from an insurance provider.
  • Property Management Fee: Usually around 10% of the monthly rent.
  • Mortgage: Use an online mortgage calculator, like the one here on BiggerPockets, to calculate the monthly payment. Confirm with your lender what your down payment and interest on the loan will be to ensure you are using accurate numbers for your calculations.
  • HOA: This can be tough to find sometimes. The seller or agent may know the number already, but if not, you will have to call the HOA of the neighborhood. If you only know the annual fee, divide by 12. Don’t skip out on finding out what the actual HOA is! The HOA can absolutely kill a property’s cash flow.
  • Vacancy: I conservatively estimate 10% of the monthly rent toward vacancy expenses. In situations where you have a rockstar property manager or your tenants are under a lease option, the actual percentage should be much less. I still use 10% no matter what just to be sure I have a conservative margin.
  • Repairs: Again, this is an estimate, but it should not be left out. Just like with vacancy, I err on the side of conservative. If a house is a turnkey property or recently rehabbed and gets a good report from the inspector, I use 5% of the monthly rent. If the property is not in top shape, conservative could mean closer to 25%. Use your judgment on deciding what percentage to use for your estimate, but don’t overestimate the quality of your property and estimate too low.

businesswoman doing paperwork at office desk, working through finances, using calculator and making notes in her notebook with pen

3. Subtract the monthly expenses from the monthly rent (= net income).

This is your monthly cash flow. Yay! Hopefully it’s positive. If it’s not positive, run.

Related: The Top 8 Real Estate Calculations Every Investor Should Memorize

4. Calculate the returns.

Two numbers I want to see on any property I evaluate are the cap rate and the cash-on-cash (COC) return.

Cap Rate

This gives you an idea if you are buying the property at a good deal. It basically compares the return on investment (ROI) to the purchase price.

The cap rate equation:

Net Annual Income / Purchase Price = Cap Rate

NOTE: I don’t include the mortgage payment in this calculation.

The lowest cap rate I would ever want to see for any property, whether residential or commercial, is 6%. The lowest I would want to see on a residential rental property in this market is 8%, and even then, there better be a good reason it’s that low (property in a “sexy” market, highly desirable area, etc.). Anything over 8%, and you are doing well in my opinion.

Cash-on-Cash Return

This number is how much return you are getting on the money you invest. If you pay all cash for a property, this number will be the same as the cap rate. If you are financing, this number is the most accurate way to see the actual return you are getting on your cash-in and the leverage. Here is the equation (and remember to include the mortgage payment since this one is totally focused on financing):

Net Annual Income / Total Cash Invested = Cash-on-Cash Return

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Understand the difference? One is a measure of how good of a deal you are getting on the purchase price, and the other tells you the exact return on your money you are getting. They are the same for an all-cash buy but can be very different for a leveraged purchase.

Pro Tip: If you compare the cash-on-cash returns of an all-cash buy versus a financed buy, you may quickly see the benefit of leveraging! Way more bang for your buck! Try it out on a napkin sometime.

Practice Problem—on an Actual Napkin

Apply these steps to an actual property? On a real napkin? You got it.

Even more fun, I’m going to use a property that I bought for myself in Atlanta.

napkin2

What do you think? Good deal? Absolutely!

I'm pocketing $358/month in cash flow (the actual number when there are no vacancies and repairs is $558!), the cap rate is 9.7%, and the cash-on-cash return is 17.97%. Not only are the returns great, but the tenants are under a three-year lease, and the property is in a great area. Score!

The Bottom Line

Running the numbers on a potential rental property purchase is easy. If you can remember what numbers you need to know, it will take you no time at all to do this for every property you look at. Jot down the list of expenses on a scrap sheet of paper, fill in the numbers, and calculate your cash flow. Done.

I’ve done this on multiple napkins in the past. Write everything out, and look for positive cash flow. If it’s not there, ditch the property and move on to the next.

The only trick to this version of running numbers is that the calculation doesn’t include any expenses for rehabs or any work that may have to be put into a property once you purchase it. I usually only deal with turnkeys, which are fully rehabbed when I buy them, so this formula works because there is no work required on the houses.

At the end of the day, numbers are just that—numbers. The reality of a property after you buy it may give you far different numbers than what you initially calculated.

For instance, Detroit. Oh, Detroit. On the surface, the numbers are out of this world. In reality, because of several key market factors, those initial numbers often turn out to be so far from reality (in a bad way). If you are a Detroit investor, rock on, and I wish you well. It’s just not my thing.

The point is, don’t ever just go off the numbers on a property. But the numbers are an important first step in evaluating a deal. If you don’t have a solid reason to believe you will be getting positive cash flow consistently out of a property, don’t bother with it.

Any horror stories? If you initially calculated that a property would have great returns and then the reality was something totally different, what caused it?

Weigh in with a comment!

Ali Boone is a lifestyle entrepreneur, business consultant, and real estate investor. Ali left her corporate job as an Aerospace Engineer to follow her passion for being her own boss and creating t...
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    Gloria Sheridan Rental Property Investor from Marietta, GA
    Replied over 1 year ago
    Is it fair to assume that the various calculators on the Bigger Pockets Tools section calculate the Purchase Cap Rate by ignoring whether I’m financing the property or not, as you suggest? I’ve tested a few samples of my own reports, and I can’t get the calcs to match. So, it your way correct, or the method used on the BP calculators?
    Jason Laabs
    Replied about 1 year ago
    Cap rates always “ignore” debt service. I’m comfortable saying that BP calculators do as well.
    Ali Boone Business Owner & Investor from Venice Beach, CA
    Replied over 1 year ago
    Hi Gloria, I’ve never used any of the BP calculators to know what they use to be able to respond. Sorry!
    Jason Laabs
    Replied about 1 year ago
    Cap rates always “ignore” debt service. I’m comfortable saying that BP calculators do as well.
    Zachary Dahlke from San Diego, CA
    Replied over 1 year ago
    Hey Ali, I love numbers and have been running number, using spreadsheets and using the BP rental property calculator a lot to compare and get good at analyzing deals. With that said, I have a few questions: 1. I noticed you did not include CapEx at all in your numbers? A lot of folks use anywhere from 5-10% of rent for Capex. This would drastically change your CAP rate and Cash on cash return numbers. So my question is, are you leaving out CapEx because these are TK properties and you are not planning on replacing big items like electrical/plumbing/HVAC/Roof/windows anytime in the next 10 years? 2. I saw you had minimum criteria for CAP rate of 6% (usually works if you can meet the 1% rule and 50% rule)… do you have a minimum cashflow per property and/or a minimum CashonCash return you need to hit? e.g. “I need 8% ConC, 6% CAP rate, and $150 cashflow/unit.” Thanks for your awesome content!
    Jerry W. Investor from Thermopolis, Wyoming
    Replied about 1 year ago
    Hey Ali, For an engineer you did a good job of making your calculations simple. I also love that you got Frank Gallinelli pulled into a small debate. That guy is scary smart. I wished I had taken a class from him 40 years ago. Turn key absolutely will not work in my area, but you have had some good results in different areas. I understand you got into Atlanta before it took off. Despite this article being quite old in BP years it is still very spot on. I do use a 5% cap rate on my calculations, but other than that I do the same thing you do. I have literally done it on a napkin and made an offer shortly afterwards. Thanks for taking the time to write this 6 years ago.
    Jason Laabs
    Replied about 1 year ago
    @Ali Thanks for proving that its really simple and the millions of words wasted and arguments that ensue are really a waste of hot air. It can be as complicated or as simple as you make it. The most successful single investor in the world, Warren Buffet, is a very simple man. He either understands it or he doesn’t. If he doesn’t, he moves on to things he does and he deals in the billions of dollars range and he is a long term investor. The longer the investment horizon, the more irrelevant the advanced calculus becomes.
    Jacob Kalanihuli Moniz Naki New to Real Estate from Honolulu, HI
    Replied 9 months ago
    This was a great post and it will help me to begin my journey thank you.
    Fady Abdulahad
    Replied 9 months ago
    You forgot to add the termite inspection cost and the HVAC annual maintenance if you are doing one. Thanks for the article!
    Ellen Diamond from Oakland, CA
    Replied 9 months ago
    You mentioned that you look for a minimum of 8% cap rate. What about cash on cash? Also, it looks like you included the mortgage payment in the cash on cash return. Thanks. Great article. Ellen
    Christian Johnston
    Replied 7 months ago
    Thanks!
    Gabriel Dominic Gonzales Rental Property Investor from Phoenix, AZ
    Replied 7 months ago
    Very helpful.
    Mark Keeler from Fremont, California
    Replied 7 months ago
    I don't see the cost of the napkin in the calculation.
    Tyler Stout New to Real Estate
    Replied 4 months ago
    Ali this is super awesome! Thank you! I appreciate how easy this is to understand and execute! I watched Brandon Turner's 90 Day Challenge Webinar and let that be my kick-start for real estate! Therefore, i'm very much so in the infancy stages of studying and learning real-estate, specifically rental properties! Thanks for your awesome articles and insights!
    Dominique Nolen
    Replied 3 months ago
    I've been so confused about cap rate and cash-on-cash return and your article broke them down perfectly! Thanks, Ali!