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
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It doesn’t matter if you failed pre-calc or graduated with a Ph.D in theoretical physics. All real estate investors have to learn to 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—because they’re the core building blocks of rental property analysis.

There are several things I do and look at with any new potential property, but the most important is the numbers. If they aren’t good, I walk. Save yourself some time by running the numbers before you do anything else. If they work, awesome—you didn’t waste energy, money, and time.

What numbers do I run? Well, what should anybody care most about when real estate investing? Cash flow, or your monthly earnings. It doesn't matter whether you're investing in single-family homes, a duplex, or large multifamily apartment buildings. You need to know these numbers either way.

What determines cash flow? Income and expenses. Simple.

People make metrics out to be so complicated. 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—even if you did fail pre-calc.

Ready? All you need are the numbers and a napkin to do a basic cash flow analysis.

Before diving into real estate investing, make sure you understand how to compare markets and properties. Whether you’re trying to decide between investing in Boise or Sacramento—or you’re just comparing two similar homes—this guide will walk you through all the numbers you need to know. From calculating cash-on-cash return to running a comparative market analysis, the experts at BiggerPockets demonstrate the steps you need to follow and the statistics you must know with The Beginner’s Guide to Real Estate Market Analysis.

Running a Rental Property Analysis… on a Napkin

While you can calculate potential rental income in a spreadsheet (and, okay, let’s be honest: you’ll probably want to do that too), why not start with paper? Pen and paper (or, in this case, pen and napkin) get you up close and personal with the number, so you can be sure your investment property sings.

Pro tip: After running the initial numbers, plug your details into the BiggerPockets Rental Calculator for a full report. We'll help you determine the profitability of a potential rental property, estimate potential monthly and annual cash flow, calculate return on investment, and plan for unforeseen expenses. You can even create a PDF to show your partners.

1. Figure out the monthly income (gross income)

This will either be rent the current tenants are paying, the asking rent, 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. If the property already has tenants paying a certain rent, or you have an ideal asking rent in mind, make sure it's realistic for the neighborhood before moving forward. Are the existing tenants paying above market rent? They might be inclined to leave. And if they're paying below market rent, there may be room for a future increase.

2. Calculate the monthly operating expenses

These may include property taxes, insurance, property management fees, mortgage or financing costs, and homeowner’s association (HOA) fees.

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

Here’s how to estimate your total 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 company fee: Usually around 10% of the monthly rent.
  • Utilities: Ask the previous owner for bill estimates to get a rough idea of your expected monthly spend. Of course, if tenants will pay utilities, you don’t need to include this in your equation.
  • Financing: Use an online mortgage calculator, like the one here on BiggerPockets, to calculate the monthly mortgage payment for your debt service. 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: Sometimes, HOA fees can be tough to determine. The seller or agent may know the number already—but if not, you will have to call the neighborhood’s HOA. If you only know the annual fee, divide by 12. Don’t skip out on finding out what the actual HOA fee is! It 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 as a conservative margin.
  • Repairs: Again, this is an estimate, but it should not be left out. Just like with vacancy, I err on the conservative side. 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 to decide what percentage to use—but don't overestimate the quality of your property and estimate too low.

Related: How to Estimate Future CapEx Expenses on a Rental Property

3. Subtract the monthly expenses from the monthly rent

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

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.

Capitalization rate (cap rate)

This gives you an idea if the property is a good deal. It basically compares the return on investment (ROI) to the purchase price. Here’s the cap rate equation:

Net operating income (NOI) ÷ purchase price (or market value, if you already own the property) = 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, like the property is in a “sexy” market or highly desirable area. Anything over 8% means you’re doing well, in my opinion.

Related: Cap Rate: A Must-Have Number for Rental and Commercial Investors

Cash-on-cash return

This number indicates 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 focused on financing:

Net annual income ÷ total cash invested = cash-on-cash return

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Understand the difference? One measures 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.

Related: How to Calculate Cash-on-Cash Return (Made Easy!)

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!

  • Cash flow: $358 per month—and actual number when there are no vacancies and repairs is $558
  • Cap rate: 9.7%
  • Cash-on-cash return: 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!

Running a rental property analysis takes no time at all. Jot down the list of expenses on a scrap sheet of paper, fill in the numbers, and calculate your cash flow. Done. In fact, I’ve done this on multiple napkins. Write everything out and look for positive cash flow. If it’s not there, ditch the property and move on to the next.

What to know before running the numbers

The only trick? The calculation doesn’t include expenses for rehabs or 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 purchase may create far different numbers than your initial calculations. 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 almost 2 years 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 over 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 almost 2 years 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 over 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 almost 2 years 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!
    John Erlanger
    Replied 1 day ago
    Capex is not an operating expense so you would not factor it into NOI.
    Jerry W. Investor from Thermopolis, Wyoming
    Replied over 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 over 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 about 1 year ago
    This was a great post and it will help me to begin my journey thank you.
    Fady Abdulahad
    Replied about 1 year 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 about 1 year 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 about 1 year ago
    Thanks!
    Gabriel Dominic Gonzales Rental Property Investor from Phoenix, AZ
    Replied about 1 year ago
    Very helpful.
    Mark Keeler from Fremont, California
    Replied 12 months ago
    I don't see the cost of the napkin in the calculation.
    Tyler Stout New to Real Estate
    Replied 10 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 8 months ago
    I've been so confused about cap rate and cash-on-cash return and your article broke them down perfectly! Thanks, Ali!
    Jennifer Bayon New to Real Estate from Chicagoland
    Replied 3 months ago
    Has anyone put these numbers into a spreadsheet? I've done so and don't get the same answers! Any insights from the crowd? Many thanks!
    Peter Robinson
    Replied 3 months ago
    Agreed the numbers don't add up. Annual net is $4296 not $9168.. (358*12=4296) $4296/$94500 would give a Cap rate of 4.5% not 9.7% Unless I'm missing something...
    J.R. Shaw
    Replied 3 months ago
    Don’t include debt service when calculating cap rate. The cap rate is correct.
    Jonathan Gaska
    Replied 2 months ago
    Why not? Isn't debt service all part of the mortgage? How would we calculate the annual income then and why doesn't she mention that the debt service isn't included. I'm a beginner so I'm confused by this. Any insight is appreciated!
    John Erlanger
    Replied 2 months ago
    Cap rates tell you what investors have paid for NOI. A mortgage is not an operating expense. Of course there is no reason for an investor to calculate a cap rate. This is just wasting time and doesn't tell you much. You want cap rate comps from closed sales of similar properties. All this cap rate means is that this investor paid about $10.31 for each possible dollar of NOI. If you see the comps are 12% then they overpaid$1.99 for each dollar!! That is why you don't calculate cap rates. This is pure BS.
    John Erlanger
    Replied 3 months ago
    Why would you bother to try to calculate a cap rate? What do you think that 9.7% result means? You are wasting time.
    Reks Mouk
    Replied 2 months ago
    For the example, How did you get $9168 for the annual net in the Cap Rate calculation? and how did you get $4296
    Joshua Hoffman
    Replied 2 months ago
    $9168 for Cap Rate is based on the following: Cash flow plus Mortgage Cost Cash Flow: $358x12=$4296 + Mortgage: $406x12=$4872 Total= $9168 $4296 is the Cash Flow: Income-Expenses x 12(months)
    Gabriele Planzo
    Replied 2 months ago
    This stuff is so confusing to me.. My cap rate based off my purchase price($220k) 5 years ago is 9%. If I take the 'current' cap rate based on today's value of my house (330k) is now 6%. What exactly is this telling me? lol
    John Erlanger
    Replied 2 months ago
    You bought NOI for $11.11 per dollar and now could sell it for $16.67!
    Som Jafari
    Replied about 1 month ago
    Where do the $9168 and $4296 amounts come from?! How is the Annual net being calculated here?
    Sherman Elliott from Tucker, Georgia
    Replied 20 days ago
    Thank you Ali for posting this is article, and for all of those supporting comments, They all serve its purpose of explaining and clarifying those #s. For me being a newbie at this, I really like knowing what could be the end numbers before getting started and what the expected return on the investment should/could yield !!
    Taylor King from Columbus Ohio
    Replied 2 days ago
    Do you base cap rate off loan price? Or market? If based off loan (191k), my cap rate is 8.5%. If based off market of house (~300k), my cap rate is 5.5%. Which one should I use to determine if I have a good deal? Thanks for this informational blog!