A good rental investment will have at least 50% of it’s monthly rental income left over after paying all of the bills. Having a positive cash flow is extremely important when you own rental properties. In our calculator, we include your purchase price and any repairs you must make as part of your initial cash investment. Unlike CAP rates, Cash on cash returns include financing costs. Cash on Cash returnĬash on cash or CoC return is similar to CAP rate except that Cash on Cash compares the actual amount of money you put into a property and accounts for financing. If you purchased the property from a sibling, enter choose “Purchasing the Property” and enter you purchase price and closings costs. If you have inherited the property, we calculate the CAP rate based on the market value of the property. In our calculator we also include any repairs that must be completed on purchase as we consider this part of the initial purchase costs. CAP rate does not account for any debt or mortgages against the property. The higher the CAP rate, the better the investment. It is determined by dividing the net annual operating income(NOI) of the investment, by the purchase price or market value. CAP RateĬapitalization Rate is universally used as a way of comparing two or more investments. When using the Gross Rent Multiplier, be consistent with whether or not you include immediate repairs and closing costs. Purchase Price / Gross Annual Rents = Gross Rent MultiplierĪnother way of thinking of the GRM is, “If I collect all of the rents and don’t have any repairs, now many years will it be before this investment is paid for?” To calculate the Gross Rent Multiplier divide the gross rents by the purchase price. It is a ratio of comparing the gross rents to the purchase price. The Gross Rent Multiplier for an investment property allows you to compare two different properties. For example, if gross rents each month are $1,200 the maximum you would want to pay for this property would be $120,000. In it’s simplest form, it multiplies your gross monthly rent times 100 to determine the maximum purchase price. The 1% rules is a quick and dirty way used by many investors to determine if a rental property is a good investment. Five measurements of a real estate investment’s value The 1% Rule
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