Understanding Your ROI Metrics
Successful real estate investing isn't about guessing; it's about knowing your numbers. This calculator provides three critical metrics:
1. Net Operating Income (NOI)
Formula: Annual Rent - Operating Expenses (excluding mortgage).
NOI tells you how much cash the property generates before debt service. Lenders use this to determine if the property can support a loan.
2. Cap Rate (Capitalization Rate)
Formula: NOI / Purchase Price
Cap Rate is the gold standard for comparing properties. It represents your theoretical return if you paid all cash. A "good" cap rate depends on the market, but typically 5-8% is considered solid in stable areas.
3. Cash-on-Cash ROI
Formula: Annual Cash Flow / Total Cash Invested
This is the most important number for most investors. It measures the efficiency of your specific dollars in the deal. By using leverage (a mortgage), you can often achieve a Cash-on-Cash return of 10-15%+, far outpacing the stock market.
Investment Rule of Thumb
Many veteran investors stick to the "1% Rule": The monthly rent should be at least 1% of the total purchase price. E.g., a $200,000 house should rent for $2,000/month.