Rental Property Calculator

What Is Rental Property Investment?

Investing in rental properties involves buying real estate with the intention of generating income through renting, holding, or selling it. Depending on the type and size of the property, investors may need varying levels of expertise to manage and profit from their investment.

Rental properties can include a range of real estate, such as single-family homes, duplexes, apartment buildings, office spaces, or even commercial plazas. In some cases, industrial buildings can also serve as rental investments. Larger commercial properties—like office complexes or apartment buildings—tend to be more complex due to higher maintenance, varied expenses, and management challenges.

While rental properties often require substantial capital and careful cash flow management, they typically offer greater stability than stock market investments. They also provide potential tax benefits and protection against inflation. With the right financial planning and tools like our Rental Property Calculator, these investments can yield strong returns.

How Rental Properties Generate Income

There are two main ways to earn from rental properties:

1. Rental Income – Steady monthly payments from tenants offer ongoing cash flow.

2. Property Appreciation – Over time, the property’s value may increase, allowing owners to make a profit when they sell.

While rental income provides regular returns, appreciation offers a lump-sum gain when the property is sold.

Owner Responsibilities

Owning a rental property involves active management. As a landlord, you’re responsible for overseeing both the property and the tenants. Common duties include:

• Tenant Management – Screening applicants, drafting lease agreements, collecting rent, and handling evictions if necessary.

• Maintenance & Repairs – Performing routine upkeep, renovations, and fixing issues.

• Administration – Managing rent prices, handling taxes, maintaining budgets, and filing necessary paperwork.

Many property owners hire a property management company to handle these tasks—especially those with limited time or who live far from the property. These services typically charge around 10% of the rental income.

General Real Estate Rules to Consider

While every real estate market is different, investors often use a few common rules of thumb to quickly evaluate potential rental properties:

• 50% Rule – Operating costs (excluding mortgage) are typically about 50% of rental income. The remaining 50% is generally used to cover mortgage payments.

• 1% Rule – Ideally, a property’s monthly rent should equal at least 1% of its total purchase price after any repairs. In high-return scenarios, some investors aim for 2–3%.

• 70% Rule – Mostly used in house flipping, this guideline suggests buying properties at no more than 70% of their estimated value after repairs, minus renovation costs.

While helpful, these guidelines should not replace thorough financial analysis or professional advice.

Key Investment Metrics

Internal Rate of Return (IRR)

The Internal Rate of Return (IRR) estimates the annualized return on each dollar invested, factoring in time. It’s widely used to compare investment opportunities. A higher IRR generally means a more attractive investment. IRR is often more insightful than simpler metrics like cap rate or cash-on-cash return.

Capitalization Rate (Cap Rate)

The Cap Rate measures the return on a rental property by dividing its net operating income (NOI) by its current market value:

Cap Rate = Net Operating Income ÷ Property Value

This is a quick way to compare different investment properties. Analyzing past cap rates can also help forecast future performance. If determining NOI is complex, a discounted cash flow analysis may offer a more precise estimate.

Cash Flow Return on Investment (CFROI)

CFROI, also known as Cash-on-Cash Return, looks at how much cash income a property generates relative to the money invested. This is especially important when properties are financed with loans. Ideally, CFROI increases over time as mortgage payments stay fixed and rental income grows.

Things to Keep in Mind

Higher IRR, CFROI, and cap rates are generally signs of a good investment. However, real estate rarely goes exactly as planned. Market shifts, economic downturns, unexpected maintenance, or rising vacancy rates can all impact your returns.

Relying solely on long-term projections may lead to inaccurate expectations—rental income and property value can change drastically over time. Additionally, inflation isn’t always accounted for in appreciation models, which can distort results over decades.

Use our Rental Property Calculator to test different scenarios and plan more effectively.

Other Real Estate Investment Options

Real Estate Investment Trusts (REITs)

REITs are companies that allow individuals to invest in real estate portfolios without buying property themselves. Investors earn income from a mix of commercial, residential, or industrial real estate assets. REITs may be publicly traded or privately managed and are a great way to gain passive real estate exposure alongside stocks and bonds.

Property Flipping

Also known as real estate trading, this involves buying properties, making improvements (or not), and selling them quickly for a profit. This strategy—commonly referred to as house flipping—requires strong market knowledge and quick decision-making.

Wholesaling

Wholesaling involves securing a contract on a property and then selling that contract to another investor. The wholesaler never actually owns the property but profits from the transaction by connecting buyers and sellers.