Rental Income Calculator

Q1: What is a good cap rate for a rental property?

A: A cap rate (capitalization rate) between 5% and 10% is generally considered good for rental properties depending on location and property type. Properties in expensive urban markets like New York or San Francisco often have cap rates of 3% to 5% because prices are high relative to rent. Properties in secondary markets or the Midwest may offer 7% to 10% cap rates. A higher cap rate means better income relative to property price but may also indicate higher risk or a less desirable location.

Q2: What is the difference between cap rate and cash-on-cash return?

A: Cap rate measures a property's income potential regardless of financing by dividing net operating income by purchase price. It is useful for comparing properties independently of how they are financed. Cash-on-cash return measures the actual cash income earned on the cash you invested including your down payment and closing costs. It reflects your real-world return after mortgage payments. A property can have a good cap rate but negative cash-on-cash return if the mortgage payment exceeds the net income.

Q3: What is a realistic vacancy rate to use?

A: The industry standard vacancy rate for single-family rentals is 5% to 8% annually — meaning the property is expected to sit empty for about 2 to 4 weeks per year due to tenant turnover cleaning and re-leasing time. In tight rental markets with low supply vacancy rates can be as low as 2% to 3%. In markets with high rental supply or seasonal demand vacancy may be 10% or higher. Always use a realistic vacancy rate — underestimating vacancy is one of the most common mistakes new landlords make when projecting rental income.

Q4: What expenses should I include when calculating rental income?

A: Include all monthly and annual costs: mortgage principal and interest, property tax, homeowners insurance, property management fees (typically 8% to 12% of monthly rent), maintenance and repairs (budget 1% of property value annually), HOA fees if applicable, and a capital expenditure reserve for big ticket items like roof HVAC and appliances. Many landlords underestimate expenses — a common rule of thumb is the 50% rule where roughly 50% of gross rent goes to expenses excluding mortgage payments.

Q5: What is a good cash-on-cash return for a rental property?

A: Most real estate investors target a cash-on-cash return of 8% to 12% annually. A return below 6% is considered marginal while anything above 12% is excellent. However negative cash flow is not always disqualifying if the property appreciates significantly in value — many investors in high-cost markets accept negative monthly cash flow in exchange for long-term appreciation gains. Your target return should align with your investment goals — immediate income versus long-term wealth building.