Cap rate calculator for a rental property

The long-term rental card reports four figures: estimated monthly rent, annual net operating income, a cap rate, and a gross rent multiplier. This page writes down the arithmetic behind those four lines and runs it on the same round inputs the offer calculator and the BRRRR page already use. The dollars are a worksheet so the division can be checked by hand. They are not a closed sale, not a listing, and not a rent roll. Nothing on this page is uploaded. There is no login and no request to a property API.

The lines on the rental card

Entry cost, which the formula calls total investment, is the purchase price plus the rehab. On a report, the purchase price is the maximum allowable offer. Buyer closing, seller closing, and the monthly holding line live on the flip projection. They are not added here. A mortgage payment is not subtracted. The cap rate is the return on the cash it took to buy the house and repair it, with no loan in the math.

Rent is an estimate, and it is the same estimate the BRRRR card uses for that property. It is the average of 1 percent of after-repair value and $1.25 per square foot of living area. Each of those two pieces is rounded to the nearest dollar, then the average is rounded. A half dollar rounds up. If square footage is zero, both pieces use 1 percent of after-repair value, so the result is that 1 percent figure. A year of gross rent is that monthly figure times 12, with no further rounding.

Expenses are 45 percent of that annual gross rent, rounded to the nearest dollar. Net operating income is annual gross minus that rounded expense line. Round the expense dollars first and then subtract. Rounding 55 percent of gross and calling it income can land a dollar away when the 45 percent line ends in half a dollar. The 45 percent share stands in for taxes, insurance, maintenance, vacancy, and management. It is not an itemized budget. The refinance card uses a different share, 50 percent, and only on the cash the new loan did not return. Do not paste one percent into the other formula.

Cap rate is net operating income divided by purchase plus rehab. The percent is round(income / investment × 1000) / 10, which is one decimal place, with a trailing 5 rounding up. If purchase plus rehab is zero, the cap rate is reported as 0 rather than a division by zero. Gross rent multiplier is the same purchase-plus-rehab total divided by a year of gross rent, then round(total / gross × 10) / 10. The card prints that as a one-decimal multiplier, such as 5.8x. If annual gross rent is zero, the multiplier is 0. Classic gross rent multiplier divides the purchase price alone by a year of rent. This card includes the rehab in the numerator, so a repair budget changes the multiplier even when the rent does not.

Worked example from the offer inputs

Use the purchase price from the 25/5/3 offer so this example lines up with the MAO calculator and with the first example on the BRRRR refinance page. After-repair value is $200,000. Rehab is $40,000. Purchase is $94,000. Living area is 1,500 square feet.

• Entry cost is $94,000 + $40,000 = $134,000.
• Rent from value is 1 percent of $200,000, which is $2,000.
• Rent from size is 1,500 × $1.25 = $1,875.
• Monthly rent is the rounded average of $2,000 and $1,875, which is $1,938.
• Annual gross rent is $1,938 × 12 = $23,256.
• 45 percent of $23,256 is $10,465.20, which rounds to $10,465 of expenses.
• Net operating income is $23,256 − $10,465 = $12,791.

Cap rate is $12,791 / $134,000. That quotient times 1,000 is 95.455, which rounds to 95, then divided by 10 is 9.5 percent. The card prints 9.5%. Gross rent multiplier is $134,000 / $23,256. That quotient times 10 is 57.619, which rounds to 58, then divided by 10 is 5.8. The card prints 5.8x. Both figures use the $134,000. Neither one uses the $94,000 purchase by itself, and neither one subtracts a mortgage payment from the $12,791.

The comparison card labels a cap rate of 8 percent or higher as Low, 5 percent up to 8 as Medium, and under 5 as High. 9.5 percent is in the Low band. The band is a label on this percent. It is not a statement that a tenant, an appraisal, or a tax bill will cooperate. A cap rate of exactly 8 percent is Low. A cap rate of exactly 5 percent is Medium.

Same rent, more cash in the denominator

Keep the $1,938 rent and the $12,791 of income, and replace the purchase and the rehab. Purchase is $120,000. Rehab is $50,000. Entry cost is $170,000. Expenses do not change, because they are a share of rent, and the rent did not change. Cap rate is $12,791 / $170,000. That quotient times 1,000 is 75.241, which rounds to 75, then divided by 10 is 7.5 percent. The multiplier is $170,000 / $23,256. That quotient times 10 is 73.099, which rounds to 73, then divided by 10 is 7.3. The card would print 7.5% and 7.3x.

The income is the same $12,791. The cap rate fell from 9.5 percent to 7.5 percent, and the multiplier rose from 5.8 to 7.3, only because the denominator grew by $36,000. A rehab number you typed low will make both figures look better than the job you actually build. Price the work before you trust either one. The scope of work checklist is the room list behind the rehab field. 7.5 percent sits in the Medium band, because it is at least 5 and under 8.

The second refinance example, read as a rental

The BRRRR page also runs after-repair value of $200,000, purchase of $120,000, rehab of $50,000, and living area of 1,200 square feet. Read those same inputs as a rental, without the loan. Rent from value is still $2,000. Rent from size is 1,200 × $1.25 = $1,500. Monthly rent is $1,750. A year of rent is $21,000. 45 percent of $21,000 is $9,450 exactly, so no rounding changes it. Net operating income is $21,000 − $9,450 = $11,550. Entry cost is still $170,000.

Cap rate is $11,550 / $170,000. That quotient times 1,000 is 67.941, which rounds to 68, then divided by 10 is 6.8 percent. The multiplier is $170,000 / $21,000. That quotient times 10 is 80.952, which rounds to 81, then divided by 10 is 8.1. The card would print 6.8% and 8.1x. 6.8 percent is Medium on the card. On the refinance page, the same inputs leave $20,000 of cash in the deal and report 52.5 percent cash-on-cash on that leftover $20,000, using a 50 percent expense share. The 6.8 percent cap rate is the return on the whole $170,000. Quoting 52.5 percent as the rental yield uses the wrong denominator and the wrong expense share.

What the worksheet leaves out

It does not know the rent a tenant signed. If you have a lease, replace $1,938 or $1,750 with that monthly rent and multiply by 12 again. It does not know this year’s tax bill. If you already itemized taxes, insurance, maintenance, vacancy, and management, use that total as the expense line. Keeping the full 45 percent on top of an itemized budget expenses the same bills twice. It does not know a mortgage payment, an interest rate, or a down payment. A financed purchase can show 9.5 percent here and still fail once the payment is due. Add the payment outside this page. The formula has no rate to multiply, and inventing one would present a payment the rental card does not calculate.

Vacancy is inside the 45 percent, not a separate month of empty rent. Closing costs you paid in cash are outside the $134,000. If those dollars are part of what the rental had to earn back, add them to the denominator yourself and divide again. The flip projection already counts buyer closing at 3 percent of the purchase price. That 3 percent is a different worksheet. Mixing it into this cap rate without saying so makes the two cards impossible to reconcile.

Use the first example when you want every line from rent through 9.5 percent and 5.8x. Use the middle example when you want to see the denominator move while income stays $12,791. Use the last example when you want the rental reading of the inputs that produced the 52.5 percent refinance figure. A signed lease, an itemized expense budget, or a loan payment belongs next to those results, not inside them.

Questions