Investing in rental property offers the potential for steady income and long-term appreciation. One of the first metrics investors examine is rental yield. In simple terms, rental yield represents the annual rent you receive as a percentage of the property's value. High rental yields indicate that the property generates a significant amount of income compared to its price. To calculate it, take the total annual rent, subtract annual expenses, and divide the result by the purchase price. This figure helps compare properties across different markets or price ranges.
The capitalization rate—commonly shortened to cap rate—evaluates a property's profitability by dividing net operating income (NOI) by the purchase price or market value. NOI is your rental income minus operating expenses such as property taxes, insurance, maintenance, and management fees. Unlike rental yield, cap rate typically ignores financing costs, making it a useful way to compare properties regardless of how you finance them. A higher cap rate often signals a higher return on investment, but it may also come with increased risk or lower property appreciation potential.
The formulas behind this calculator are straightforward:
where is total annual expenses and is the property's price. Vacancy rate factors into the calculation by reducing expected rent. For example, a 5% vacancy rate means you anticipate one out of every twenty months without rental income. The calculator multiplies monthly rent by 12, subtracts the vacancy portion, and then deducts monthly expenses multiplied by 12 to find NOI.
Even in hot markets, properties rarely remain fully occupied all the time. Tenants move out, repairs require downtime, or local economic issues cause delays in finding new renters. Factoring in a vacancy rate offers a more realistic picture of potential income. Lower vacancy improves both rental yield and cap rate because more of the year generates rent. High vacancy can indicate a neighborhood with low demand or an overprice property, signaling greater risk.
After entering your numbers, the output displays annual net operating income, rental yield, and cap rate. Many investors look for cap rates between 5% and 10%, though this varies by region and risk tolerance. A property with a cap rate above 10% might seem attractive, but it could also be in an area with slower appreciation or higher maintenance costs. On the flip side, premium properties in desirable neighborhoods may show lower cap rates but offer steadier appreciation over time. Use the calculator as a starting point, then investigate each property's unique characteristics before buying.
If you finance the purchase with a mortgage, monthly loan payments will affect your cash flow even though they aren’t part of NOI. A positive cash flow occurs when rental income exceeds the sum of expenses and mortgage payments. Negative cash flow means you’re subsidizing the property each month. While some investors accept short-term negative cash flow in exchange for long-term appreciation, others seek immediate profitability. Adjusting the input fields helps you test different scenarios, such as larger down payments or refinancing at a lower interest rate, to see how your return changes.
No calculator can account for every variable. Neighborhood desirability, local tax policy, and future development plans all impact rental performance. Before purchasing, research comparable rents in the area, inspect the property thoroughly, and consult professionals for insight into market trends. Good property management can reduce vacancy and control maintenance costs, both of which improve cap rate and yield. Conversely, ignoring small issues often leads to expensive repairs down the road, eroding profits.
Suppose you’re evaluating a duplex priced at $300,000. Each unit rents for $1,200 per month, giving you $2,400 in gross monthly rent. Operating expenses run about $500 per month, and you expect a 5% vacancy rate. Annual rent is therefore $2,400 × 12 = $28,800. Subtracting 5% for vacancy leaves $27,360. Operating expenses total $6,000 per year. Net operating income is $21,360. Dividing NOI by the purchase price yields a cap rate of about 7.1%. Rental yield is $21,360 divided by $300,000, also roughly 7.1% because we subtracted expenses. These numbers may make the property appealing compared to other investments, but you’d still need to inspect the neighborhood, evaluate potential repairs, and factor in financing costs.
Cap rate and rental yield are snapshots based on current data. Over time, rents may rise, expenses may fluctuate, and property values may appreciate. Revisit these calculations each year to gauge performance and inform decisions about rent adjustments or capital improvements. Keeping detailed records allows you to compare the property’s actual results against projections. Consistent positive cash flow and stable occupancy can signal that it’s time to acquire additional properties, while declining metrics may suggest selling or upgrading.
Real estate investing is both an art and a science. Tools like this calculator provide the scientific side—objective numbers that help you gauge profitability. The art lies in understanding local markets, choosing reliable tenants, and maintaining properties effectively. Use the rental yield and cap rate results as a foundation, but pair them with on-the-ground research and advice from seasoned investors. With a realistic picture of potential returns, you can build a portfolio that balances risk and reward.
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