Rental Property Numbers

Rental Property Numbers so Easy You Can Calculate Them on a Napkin
The numbers. In this industry, you must love the numbers. Love them like they are part of you. For good or for bad, til death do you
part, never leave the numbers.
One of the biggest questions Im asked is how I go about a property once I find it. What do I do, what do I look at, how do I know if its
the one? There are several things I do and look at with any new property potential, but the most important is the numbers. If the
numbers arent good, I walk. Save yourself some time and before you do anything else, run the numbers and see if they work. If they
dont, awesome, you didnt waste time on other stuff.
What numbers do you run? Well, what should any investor care most about? Cash flow. What determines cash flow? Income and
expenses. Simple. People make running numbers out to be so complicated sometimes its a no wonder more people arent involved in
real estate. In fact, the numbers can be one of the easiest parts of shopping for a property. Unless you are a trained psychic on the
crystal ball, then predicting appreciation may be easier for you than estimating cash flow.
Ready?
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Numbers for the Napkin
1. Figure out the Monthly Income (Gross Income): This will either be rent the current tenants are paying, the asking rent (confirm this
number is realistic), or if you have neither of those you can talk to a local property manager or real estate agent who can give you a
market rent value for the property.
2. Calculate the Monthly Expenses: These include property taxes, insurance, property management fee (if applicable), mortgage or
financing (if applicable), homeowners association fee (HOA) (if applicable), vacancy and repairs. Dont forget vacancy and repairs!
They are a real part of any property investment and they can drastically affect the cash flow. Yet so many people dont think to include
them in the expenses.
Property Taxes
Look on Zillow or another online source for the most recent annual tax
amount and divide by 12.
Insurance Get a quote from an insurance provider.
Property Management Fee Usually around 10% of the monthly rent.
Mortgage Use an online mortgage calculator to calculate the monthly payment. Confirm with your lender what your down
payment and interest on the loan will be to ensure you are using accurate numbers for your calculations.
HOA This can be tough to find sometimes. The seller or agent may know the number already, but if not you will have to call
the HOA of the neighborhood. If you only know the annual fee, divide by 12.
Dont skip out on finding out what the actual HOA is! The HOA can absolutely kill a propertys cash flow.
Vacancy I conservatively estimate 10% of the monthly rent towards vacancy expenses. In situations where you have a
rockstar property manager or your tenants are under a lease option, the actual % should be much less. I still use 10% no
matter what just to be sure I have a conservative margin.
Repairs Again an estimate but should not be left out. Just like with vacancy, I err on the side of conservative. If a house is a
turnkey property or recently rehabbed and gets a good report from the inspector, I use 5% of the monthly rent. If the
property is not in top shape, conservative could mean closer to 25%. Use your judgment on deciding what % to use for your
estimate, but dont overestimate the quality of your property and estimate too low.
3. Subtract the Monthly Expenses from the Monthly Rent (= Net Income): This is your monthly cash flow. Yay! Hopefully its positive. If
its not positive, run.
4. Calculate the Returns: Two numbers I want to see on any property I evaluate are the Cap Rate and the Cash-on-Cash Return.
Cap Rate This gives you an idea if you are buying the property at a good deal. It basically compares the return on investment
(ROI) to the purchase price.
The Cap Rate equation:

Net Annual Income / Purchase Price = Cap Rate
NOTE: I dont include the mortgage payment in this calculation.
The lowest cap rate I would ever want to see for any property, whether residential or commercial I dont care is 6%. The lowest I
would want to see on a residential rental property in this market is 8% and even then, there better be a good reason its that low
(property in a sexy market, highly desirable area, etc.). Anything over 8% and you are doing well in my opinion.
Cash-on-Cash Return- This number is how much return you are getting on the money you invest. If you pay all cash for a
property, this number will be the same as the Cap Rate. If you are financing, this number is the most accurate way to see the
actual return you are getting on your cash-in and the leverage. Here is the equation, and remember to include the mortgage
payment since this one is totally focused on financing:
Net Annual Income / Total Cash Invested = Cash-on-Cash Return
Understand the difference? One is a measure of how good of a deal you are getting on the purchase price and the other tells you the
exact return on your money you are getting. They are the same for an all-cash buy but can be very different for a leveraged purchase.
If you compare the Cash-on-Cash Returns of an all-cash buy versus a financed buy. You may quickly see the benefit of leveraging! Way
more bang for your buck! Try it out on a napkin sometime.
Practice Problem, on an Actual Napkin

Apply these steps to an actual property? On a real napkin? You got it. Even more fun, Im going to use a property that I bought for
myself just a few months ago in Atlanta.
What do you think? Good deal? Absolutely! Im pocketing $358/month in cash flow (the actual number when there are no vacancies
and repairs is $558!), the Cap Rate is 9.7% and the Cash-on-Cash Return is 17.97%. Not only are the returns great, but the tenants are
under a 3-year lease and the property is in a great area. Score!
Running the numbers on a potential rental property purchase is easy. If you can remember what numbers you need to know it will
take you no time at all to do this for every property you look at. Jot down the list of expenses on a scrap sheet of paper, fill in the
numbers, and calculate your cash flow. Done. Ive done this on multiple napkins in the past. Write everything out and look for positive
cash flow. If its not there, ditch the property and move onto the next.
The only trick to this version of running numbers is that it doesnt include any expenses for rehabs or any work that may have to be
put into a property once you purchase it. I usually only deal with turnkeys which are fully rehabbed when I buy them, so this formula
works great because there is no work required on the houses.
At the end of the day, numbers are just that- numbers. The reality of a property after you buy it may turn out to give you far different
numbers than what you initially calculated. For instance, Detroit. Oh Detroit. On the surface, the numbers are out of this world. In
reality, because of several key market factors, those initial numbers often turn out to be so far from reality (in a bad way) you
wouldnt believe it. If you are a Detroit investor, rock on and I wish you well. Its just not my thing. Or, another example, I have
another Atlanta property that had two back-to-back evictions in only six months, so my initially calculated 32.1% cash-on-cash return
most definitely didnt pan out that year. Point is, dont ever just go off the numbers on a property, but the numbers are the most
important. If you dont have solid reason to believe you will be getting positive cash flow consistently out of a property, dont bother
with it.
Any horror stories? If you initially calculated that a property would have great returns and then the reality was something totally
different, what caused it?
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About Author
Ali Boone
Website
Ali Boone(G+) recently left her corporate job as an Aeronautical Engineer to work full-time in Real Estate Investing. She began as an
investor only two years ago but managed to buy 5 properties in just 18 months using only creative financing methods. Her focuses
have been on rental properties and overseas investing in Nicaragua.
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148 Comments
1.
Glenn Espinosa on January 19, 2013 2:03 pm
Great post Ali!
I can totally see this as a great beginner resource for new investors.
Reply
o
Mark on January 21, 2013 10:39 am
Absolutely a fantastic resource for new beginners.
Reply
o
Ali on January 21, 2013 2:21 pm
Thanks, Glenn! Its definitely geared towards simple. Numbers can obviously get more complicated, but they dont
need to start out that way. Thanks for the comment!
Reply
2.
Plus
Ankit Duggal on January 19, 2013 2:25 pm
Awesome job. Clear and concise way to analyze income properties on a back of the napkin.
Reply
o
Thanks, Ankit! The trick is to remember not to throw away the napkin or use it to clean up a mess or you have to
start all over again

Reply
3.
Pro
Brandon Turner on January 20, 2013 12:25 am
I like the approach to this, Ali. I think too many people complicate the math but its really fairly simple. Then again I was
the co-president of my High School Math League so Im kinda a math nerd.
Reply
o
Hey Brandon, does it help you feel better about being a math nerd if I tell you I minored in math in college? Not
quite as stellar of a nerd ranking, but at least I was trying

Reply
4.
A.King on January 20, 2013 6:54 am
Great article! In your Cap Rate calculation on the napkin, where are you getting the Annual Net (minus mortgage) value of
$9168? Im just not seeing it. Thanks!
Reply
o
Josh g on January 20, 2013 7:53 am
The $9168 is the monthly net (cash flow-$358) plus the mortgage payment added (406) then multiplied by 12
months
Reply

Thanks, Josh! You nailed it. Sorry, A.King, I should have clarified that better. I kind of snuck that one in
there.
Reply
Brain Helfrich on May 23, 2013 5:16 pm

So, even though you say NOTE: I dont include the mortgage payment in this calculation.
You do need to include the mortgage payment in the Cap Rate calculation. Right?
Thanks,
-Brian
Pro
Ali Boone on May 23, 2013 6:23 pm
Hi Brian (I assume Brian, not Brain? haha). No, the cost of financing (in this case the mortgage
payment) is never included in a cap rate. It is, however, included in a cash-on-cash return. That is
standard. Basically, whether or not a buyer is financing is, as I like to say, their own problem and
should not reflect on the purchase price of the property, which is what a cap rate is used for.
Cash-on-cash returns are what you care about as a financer, and there you would include the
mortgage payment.
Ali Boone on September 25, 2013 3:14 pm

(this response is months late I wrote this a while ago and just now realized it never went
through!)
Hi Brian (I assume Brian, not Brain?). No, the cost of financing (in this case the mortgage payment)
is never included in a cap rate. It is, however, included in a cash-on-cash return. That is standard.
Basically, whether or not a buyer is financing is, as I like to say, their own problem and should not
reflect on the purchase price of the property, which is what a cap rate is used for. Cash-on-cash
returns are what you care about as a financer, and there you would include the mortgage
payment.
Pro
Ayodeji Kuponiyi on January 21, 2015 8:49 am
So then its $1325 Income $561 Expense(minus Mortgage) = $764(Cash Flow) * 12 months =
$9,168. OK I get it now.
5.
Dennis on January 20, 2013 12:52 pm
Just figuring there are some on this site who are not completely familiar with financial calculations. That being said I would
also include dividing the number arrived at after dividing net yearly income by purchase price should be multiplied by 100 to
acquire a percentage figure.
I just received a panicked email from a person who ran a deal past me a year age, I told him to grab the place. He was heart
broken with his result $13,260/$50,000 = .2652. Thinking the cap rate as less then 1 percent. He is now beaming with a
26.52% cap rate.
Reply
o
Dennis on January 20, 2013 12:55 pm
I should have proof read a bit better, I hope you get the idea, multiply fraction by 100 to gain percentage figure.
Reply
Remrie on January 20, 2013 4:37 pm

Aka move the decimal two places.
Reply

exactly.. just move the decimal point two places to the right to get a percentage from a decimal.
Ooh, Dennis, great note. Yes, 0.2652 is definitely a bummer of a deal!

Reply
6.
Bryan Scott on January 21, 2013 8:49 am
Hi Ali, Good article. Just some added food for thought If you intend to buy-and-hold for 5 years, ones back of napkin
estimates are quite different than holding for 30. In that 5 years, it is very unlikely that any rehab will be required before
selling the property (while ROI can be maintained at a high percentage). However, hold that property for 10, 20, or even 30
years (part of the 401-K plan) and returns can very quickly turn back to ho-hum (not including effects of appreciation,
which we hope there will be) after having to upgrade the kitchen and the 2 bathrooms, along with replacing carpet and lino,
repainting inside and out, replacing the roof and siding and also the outdated appliances, etc., before the property will sell at
that point. As a matter of fact, in 30 years, it is possible to do at least 2 fairly major rehabs just to keep pace with renter
expectations and to maintain the highest rental income. So, I guess my concern is not just exit strategy as a buy-and-hold vs.
fix-and-flip, but that they also know how long they intend to hold. This would give rise to the need to budget the big items
at certain intervals in order to make sure enough cash-flow is held back to pay for these items when it comes time.
Additionally, having been a landlord for many years, I can personally attest that the HUD-recommended amount of hold-back
for expenses and vacancy is very nearly 16% across a portfolio of many different properties with varying Year of Construction.
This is pretty much in lock-step with your estimate of 10% for vacancy + another 5% or so for repair. The above might imply
that we need to schedule the big-ticket replacement items over time and derive a monthly percentage to hold back in
addition to repair.
Reply
o
Hi Bryan, great add! Yes, the reality of repairs is a serious consideration. Obviously there is no golden formula to
predict everything that may go wrong with a property, but all things should be considered. Definitely when I buy the
turnkeys at least, since they are freshly rehabbed, I dont usually have anything in terms of maintenance for quite a
while. but I still throw in that estimate even in the beginning because it will average out later when repairs do start
popping up. Anytime an investment opportunity arises, an investor should always think about exit strategy. Your
point definitely goes towards the debate of buying really cheap older properties even if you get it fixed up to start,
what hasnt been fixed and how much could that cost you later?
Excellent note! Thanks for sharing.
Reply
7.
Wonderful information. Never thought of adding in non-vacancy and maintenance and repair into the numbers. Im a new
investor, and will definitely put those percentages into the equation on my first rental purchase.
Reply
o
Hi Mark, glad that helps! You arent alone by any stretch. Most investors, oftentimes even the experienced ones,
dont account for vacancy and repairs. I didnt know to do that when I first started either. Funny its not more widely
known since those two things are usually, if not always, what end up costing an investor money! Just be sure to
always gauge your estimates wisely like higher repairs % if the property is an old foreclosure.
Happy investing! I hope youre enjoying it so far! Warning, it can be a bit addictive
Reply
8.
Lucas Hall on January 21, 2013 1:25 pm
Ali,
Well Done. Ive often tried to think of the best, most simplistic way to explain the preliminary calculations for a rental
purchase. I never thought about framing it in a napkin. Even the most novice of investors would be open to hearing about
that! Brilliant!
Reply
o
Thanks for the comment, Lucas! But dont let me mislead you writing on your hand, chalk on the driveway, dry
erase marker on your mirror, crayon on your kids homework they all work just as good as a napkin. Never limit
yourself.
Reply
9.
Giovanni Isaksen on January 21, 2013 8:18 pm
Great article Ali.
One simple next step is to compare the Cap Rate to the Cash On Cash Return (CCR). If the CCR is higher than the Cap Rate
you have positive leverage, i.e. you can expect a better return using the financing you have in mind. If the Cap Rate is higher
than the CCR then your leverage is negative and your return would be higher buying all cash. If that is the case the deal needs
to be reviewed more closely. Not saying its a deal killer, just that revisiting the financing options would be worthwhile.
To take a step up from the napkin/kids homework we developed the Dealizer, which crunches all those numbers and more.
Its an Excel template so its easy to store your numbers for each deal you look at and come back to them when you need to.
We use it every day in our business and are in final testing on version 5 which includes more what-ifs, more detailed
financing options and a couple new reports.
Reply
o
Thanks for sharing, Giovanni. Any tools available for investors helps. Ive seen various Excel spreadsheets and have
made some myself and they can definitely come in handy.
Reply
10.
Christopher on January 22, 2013 9:33 am
Hey everyone! I got lucky awhile back with finding a excel spreadsheet that did all the calculations for me that basically were
used in the great napkin presentation. It helps to understand the numbers more I agree.
Here is my biggest issue right now REPAIRS! If I look at a property and know it will need 30k in repairs upfront because it is a
foreclosure or something how do I add this to my financing equation? For straight cash I figured you just add it to the
purchase price and great the cap rate will be easy, but for financing I am stuck since that is what I want to use. I wonder why
anyone ever uses cash since leverage is so powerful in rentals (and is the only way I think makes holding rentals worth it).
Should I simply figure out how long I plan to hold the property, and then from there I can bump my repair % to match that?
heeeeeelllllllppppppppp.
Reply
o
Hey Christopher, thanks for writing! I agree with you about the paying all cash versus leveraging thing, but truthfully
I think people tend to be scared of being in debt. Ive heard arguments for and against there being a difference
between good debt and bad debt, but Im definitely on the bandwagon of good debt rocks! The returns on your
money are much higher and less risk to your own pockets.
I havent worked with rehab jobs yet since I only buy turnkeys, but I would imagine you could just add in the cash
required to fix her up to the amount of total cash invested in that cash-on-cash return and get an accurate % of
your return. For the cap rate, add that $30k to the purchase price, since that total is really what youd be buying the
property for (technically), to see if that cap rate is still good. Know what I mean?
Reply
o
Christopher, that is a great question. When we run numbers on the Dealizer it shows the Cap Rate based on the
purchase price and it also shows the All in Cap Rate based on the total investment, including the repairs and costs
to close. The All in Cap Rate is the one you should use for analyzing a potential purchase, Since it represents your
real investment in the property. When youre trying to sell a property most brokers will show the regular Cap Rate
to a potential buyer, hoping they dont know the difference. You can check out the Dealizer by clicking on my name,
above.
Reply

Example of All in Cap Rate:
Purchase Price + 150,000
Closing Costs + 5,000
Repairs 30,000
= Total Investment 185,000
Net Operating Income 12,000
All in Cap Rate* 6.49%
*All in Cap Rate = NOI / Total Investment
Example of regular Cap Rate:
Purchase Price + 150,000
Closing Costs + 5,000
Repairs 30,000
= Total Investment 185,000
Net Operating Income 12,000
Cap Rate* 8.0%
*Cap Rate (regular) = NOI / Purchase Price
Note how the regular Cap Rate makes the deal look better. unless you are the buyer who still has to come
up with the 5k of closing costs and 30k of repairs, which will have a real impact on returns; its also how
sellers make a 6.5% Cap Rate deal look like an 8% Cap Rate.
Reply

Sorry Giovanni, have to admit Im a bit lost on your numbers. Ive never heard of an All in cap
rate versus a regular. Without sitting down and trying some different math, I dont know where
your numbers are coming from.
Giovanni Isaksen on January 23, 2013 11:19 am

Ali, sorry I couldnt demonstrate the numbers better due to the nature of the comment form here.
Let me try a different way of explaining it. A cap rate is essentially the cash on cash return you
would earn on a property you bought with no loan. So imagine that the property your considering
will be an all cash purchase, even if you do intend to mortgage the property.
The purchase price is $150,000.00
The closing costs are $5,000.00
The repairs are $30,000.00
In our imaginary scenario were buying with all cash so the question is; what number are we going
to base our cash on cash return on? Will you use just the $150,000 purchase price? No because
youre actually putting $185,000 into the deal so your cash on cash return, and therefore your cap
rate, should be based on your entire investment, not just the purchase price. To differentiate that
from the sellers version (based solely on the purchase price) we call it the All In Cap Rate at
Ashworth Partners, my apartment investment company.
No need to apologize Ali, but if you ever wonder why your property that the seller told you was an
8 cap performs more like a 6-1/2 cap hopefully youll remember this thread.
11.
Frank Gallinelli on January 22, 2013 2:42 pm
Ali Ive made a career (or maybe a nuisance) out of telling people its all about the numbers, so I couldnt be happier than to
hear you saying the same. Also, I love simple and youve done a spectacularly good job of keeping the basics just so.
Please permit me to offer a minor tweak to your approach; theres a more-or-less standard drill where the sequence is
slightly different, but which ends up in the same place as yours and it should fit on the same napkin:
Potential Gross Income (same as your monthly rent, but usually expressed annually)
minus Vacancy and Credit Loss Allowance
equal Gross Operating Income
minus Operating Expenses (mortgage is not an OpEx, so dont include that here)
equals Net Operating Income
apply the cap rate to NOI to get your estimate of value
take that NOI and now subtract your annual debt service
that equals your annual cash flow
Of course, in real estate investing as in real life, things can get complicated. If youre planning to hold for several years, you
need projections of how the future might look, and it might not be a linear path. Tax calculations can get messy (dont even
ask about the new Net Investment Income tax or the changed capital gains rules); and partnership allocations, if you need
them, are no picnic.
What you have here is an excellent way for an investor to start looking at an income-property investment. Then, if the deal
looks promising, he or she can take the numbers to the next level. Maybe a roll of paper towels, landscape mode?
Reply
o
Hi Frank, I love it! Im a fan of paper towels myself. I do believe Ive jotted down some numbers on them before. I
wouldnt put it past me.
Thanks for the different order of calculating things. You are very right that some people prefer to look at everything
annually from the start, so good note there on being able to do that. And you nailed it with noting where in the
process the financing amount comes out and where it is included.
Reply
o
Chris on March 29, 2015 10:09 am
What is the estimate of value used for? How does one apply cap rate to NOI. Multiply? Divide?
Reply
12.
1) Ali- Thanks for the response! It got me to the right place on where I need to put my numbers in. I have been wondering
where to put closing costs and repairs in for awhile. Xcel spreadsheets are great only if you know what they mean haha! I
basically need to figure out my end number for the strategy I intend to use. I plan on using Hard Money to buy residential
detached housing and instead of flipping it I will turn it into a rental. There are lenders out there that will re-finance at 70%
ARV, so if the deal is good enough I can practically have 100% financing for my rental. Now that is a fun cash on cash return
isnt it? The banks blow and I am not about to put 25% down for a non-owner occupied and sink another 30k into the
property, so Hard or Private Money can be a great avenue for investors to keep their OWN CASH working for them.
2) By the way Ali, There are many people who have no clue how to utilize leverage but what we do is a BUSINESS. Still
boggles my mind to see duplexes out there that were selling 5 years ago 3-4x what their true value was, but that is why
investors are different. Leverage is the reason why real estate produces more millionaires than any industry, because it
allows you to purchase assets you otherwise could not. It also allows you to get an ROI of 50+% on your money from
borrowing which is stupid crazy. You just need to know how the numbers work, which is why I am glad I found this website!
Unless you are already rich (which I sure as hell am not) the only way to truly acquire wealth in real estate is through
leverage. Borrow capital an make a spread with your investment. Everyone has different ways of explaining it, but the
important thing is that you KNOW if you have positive leverage and what the spread is. The larger the spread the less risky
the property is to you.
3) Hey good point there too Giovanni! In my example where I am doing a rehab project with the intent to refinance (the only
way to make the numbers work well in my view) I just have to come up with my end cash invested, but for anyone else it
makes sense.
4) Basically Ali the cap rate is somewhat flawed in that a true purchase price of a home is really my ACQUISITION COSTS. I
tend to think this a better term because that is essentially what I am doing.
Because most of us always are utilizing a mortgage we put closing costs and repairs (as in your response to my question) in
the CASH INVESTED OUT-OF POCKET side, but as Giovanni states they should really be added to the purchase price as well to
give you a more accurate view of the CAP RATE. After all, if I am an all-cash investor my ROI is based off of the TOTAL amount
of cash it took me to acquire the property not just the purchase price.
5) Lastly, I think
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13.
Lastly, I think UNDERSTANDING YOUR LOAN CONSTANT is extremely key to understanding leverage and the spread you are
making. To me, it gets real messy just looking at cash flow or cash-on cash return and being OK with just saying yep I got
positive leverage!. Or really any other method.
Your interest rate is NOT your loan constant! Also, the down payment does not come into play for loan constant. This is
helpful because we all know the less cash you put into the property the higher the cash-on-cash return is. However, if you
have a very small spread and the house is very risky would you consider it still a great deal?
Ultimately it is like I said: The spread between the Cap Rate and your Loan Constant is one of the most important things to
understand when utilizing leverage. The larger the spread mean the asset you are purchasing is less risky. THIS IS THE
REASON WHY CAP RATE IS STILL IMPORTANT to those of us who always plan to use financing because It used to determine
risk.
Dont know if that can fit on a napkin LOL but for the basics and newbies like me I know personally this was valuable
information I learned.
Reply
o
Ali on January 23, 2013 10:24 am
Hey Christopher, thanks for the detailed response! And you know, I think you busted me. You are totally right about
adding the closing costs into the total purchase price of a property. I totally flunked on that one! See, perfect
example of even the experienced investors can leave stuff out sometimes. Similar to the comment above about
making sure to multiply by 100

I always run the same numbers multiple times because sometimes I
start writing something quick and leave something out or write a wrong number.
Can you elaborate on what you mean by loan constant? Im not even sure I know what you mean by loan
constant, so I know the newer investors probably dont either.
Reply
14.
Frank Gallinelli on January 23, 2013 9:44 am
@Giovsanni_Isaksen Sorry to pile on here, but I have to express a bit of skepticism about the usefulness of all-in cap rate.
Essentially, there are typically two flavors of cap rate in common use:
Market cap rate (NOI / selling price), which is the rate at which similar properties in a given market have actually been selling,
and
Derived cap rate, which is weighted average of the equity investors required rate of return and the debt investors (i.e.,
lenders) required rate of return (i.e., interest rate).
In practice, the two typically end up being quite close because, I believe, the investor market generally factors in the realities
of the local financing market. In my experience, I find that most appraisers and investors use the market cap rate.
Isnt this all-in approach really just assigning a different meaning to value (price + acquisition costs + repairs)? And if
the primary purpose of capitalizing income is to estimate the current value of an income property, arent you really using a
non-standard metric to come up with a non-standard measure of value? Im not sure I see how thats helpful.
A wildcard here is the use of the word repairs. A repair is an operating expense, and is not the same as an improvement
although I often see them discusssed as if they were the same. Identifying a cost as one or the other is not always clear, but
the difference in how theyre treated is important. An improvement is not a deductible expense and has no effect on the
NOI. It is a capital cost. It adds to the basis of an income property (hence reducing the gain at sale) but it doesnt really affect
the market value of the property directly. It should, however, affect it indirectly by increasing potential revenue and/or
decreasing operating costs.
On the other hand, a repair is a currently-deductible operating expense and reduces the NOI.
From my experience, an income-property investor who is buying a property that needs improvements might estimate its
current value based on capitalizing the propertys as-is income stream before fix-up. But then he or she would look at the
expected stabilized income stream after the improvements and repairs are made; next, use the standard income
capitalization approach to estimate its resale value; and finally do a discounted cash flow analysis to decide if overall return
would be satisfactory, considering the time and capital required.
I find this more straightforward, and I think it has the advantage that all parties involved are using common terminology.
Reply
o
Ali on January 23, 2013 10:26 am
I completely agree, Frank. Excellent add-in there about the repairs vs. improvements. Any information about initial
rehabs helps because I dont work with those myself. Thanks for elaborating on that one and good information to
always think about.
Im with on the All-In Cap Rate thing. Never heard of it. Sorry Giovanni.
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15.
I tend to disagree Frank because if I am an all cash buyer I want to know what my ROI is for the total cash invested is to the
property. The closing costs are what $1300 bucks for a cash buyer? Regardless they are minimal. The repairs are really the
question here. I would think that when determining whether repairs should become an added cost for Cap rate or simply
used in your operating expenses is whether the house is rent-able or not. I sold a rental last summer where you could
probably have put 7k into the property if you wanted to but the condition was fine as-is for a rental. To me then you just
bump up your maintenance and repairs to include the deferred maintenance that eventually will need to be replaced.
For what my question was specifically is foreclosed single family homes that are not rentable in their current condition. I
know this will be an upfront cost to me, because I will have to put money into the home so it is up to code for the city and
rentable. It should only make sense then that I add these costs to the purchase price to reflect a more accurate ROI that I can
expect as a cash buyer. That is because I am also putting in a rent number that I know I can get premium dollar for since it
will be turn-key.
IN THAT REGARD THEN I AGREE WITH YOU THAT THE EXAMPLE ABOVE IS INACCURATE. If you are putting 30k into the
property the NOI should look and be quite different, because by golly the rental income should be dramatically changed! As
well as the maintenance % as Ali described effecting the expenses of course.
I think from a practical standpoint most people that use financing are buying turn-key properties where they will always have
repairs as part of the operating expenses. It then just comes down to figuring out if the property is 100% move-in ready or
has deferred maintenance. Ali made a good point of this.
If there is one thing I have learned from this discussion is that there are many ways to analyze a rental property beyond the
simplest methods. Alis napkin example is excellent when dealing with turn-key properties or ones that have very little
deferred maintenance, and thus you can always factor in maintenance and repairs to your operating costs.
Where it becomes a little more challenging is in my scenario is buying foreclosed properties in very bad condition that are unrentable in their current state. Of course the added layer is then when I refinance as well.
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16.
Haha hey Ali I am probably the most knowledgeable guy that has never bought a rentalwhich kinda sucks but hey I am
working on it. As a realtor though I work with both flippers and landlords, and so I have just kinda had to learn this stuff when
analyzing deals to make sure I know what I am talking about.
http://www.investopedia.com/terms/l/loanconstant.asp#axzz2Ip5XOp9f
You can pretty much google loan constant but I used this off of Investopedia. As you will see understanding the true cost of
borrowing is essential when looking at different financing options. From a practical standpoint it is not like there are a ton of
options for financing, but what if I buy a contract for deed property? If I set up the terms correctly to get the lowest loan
constant possible it may drastically change what I am willing to pay. It will offset the higher interest rate and probably more.
In general these variables effect the loan constant:
1) Interest rate- pretty self explanatory the lower the better
2) The length of the loan- this is where I think people may get a little confused, because the longer the better. If I have a
great interest rate but it is only 10-15 years I will most likely pay something higher to have it at 30 years. I have the equation
on my excel so cant think of it off the top of my head, but this is where knowing the loan constant can help.
3) Whether it is interest only or amortized- Like I said there are not a ton of financing options available and who can get
interest only? This would probably only come into play for contract for deed homes.
So to me the loan constant is best used when trying to figure out a loan that may be 10, 15, of 30 years in relation to the
interest rate. You as the investor always want the lowest cost of borrowing. I think where people make the mistake is they
always assume the lowest interest rate is the best option and that would be incorrect!
Secondly as I stated loan constant is the true cost of borrowing so you cant use the interest rate when figuring out
leverage. You must determine this number and see what the spread is in relationship to cap rate. I dont know what the rule
of thumb should be, but my best guess is you need 4% or more for the asset to be considered less risky.
For example, lets say you are paying something like 6% for a 30-year conventional loan, and you are an average joe using his
w2 because he does not buy in a LLC. You put 20% down. Your loan constant is going to be around 7.2%, which means 11%
or more cap rate.
Now sure you will still have positive leverage if your cap rate is at 8% but boy you aint making much of a return on that. And
on top of that we all know crap dont work out the way we think it should most of the time haha! If you get that tenant from
hell or some major repairs you did not see coming things can get bad real quick.
It just goes to show you that even when using financing for rentals you must not use the cash-on-cash return when
determining if the property is a good buy or not. I think it is the #1 reason why people get into trouble buying rentals.
Now technically it is true that if the cap rate is higher than cash-on-cash return you will have negative leverage, but the point
I am trying to make is for the people who get excited on 12-15% returns. I am telling ya it is not worth it! You have one bad
year and those numbers can go negative really fast.
It is also possible to have negative leverage but still positive cash flow.
Like I said you all that own rentals probably know more than I do, but as a realtor I see deals every day that do not make
sense. I work with the part-time wannabe investors, and it never ceases to amaze me the difference between them and the
full-time investors who run this like a business.
For myself I appreciate the dialogue on this thread because I certainly dont want to be classified in the wanna-be group!
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o
Hmmm. Thanks for the explanation, but I still cant say that I have a clue what a loan constant really is or how it gets
calculated. Even the Investopedia article didnt explain much.
Im going to have to stick to my napkin on this one. I understand where you are coming from but for me this is
teetering paralysis by analysis. Yes, you are correct that there are always things we cant anticipate for fact with any
investment, but my theory on that is leaving a big enough margin. Most of my properties are netting $500/month or
so, so I consider that to be plenty of margin to make up for any complicated (if not impossible) unknowns.
Thanks again for sharing. Ill keep an eye out for that term in my readings, but for now, it just wont fit on my napkin
and I dont believe it can make my investment 100% fool-proof anyway, so at that point it is going a little too far. For
me, at least. Not saying it should be for anyone else.
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Giovanni Isaksen on January 24, 2013 8:58 am

The loan constant is the amount of the loan you have to write a check for every payment period. With an
interest only loan the constant will equal the interest rate. If you have an amortizing loan like a standard
thirty year mortgage your monthly payment will be include the interest owned on the balance plus an
amount of principal, which means that your payment will be higher than an interest only loan for the same
amount.
To figure out what your loan constant is divide the total of your annual payments (monthly X 12, quarterly
X 4, etc.) into the loan balance. If you are borrowing $100,000 at a fixed annual rate of 6% for 30 years with
monthly payments your payment will be $599.55*. Multiply 596.6 X 12 to get the total annual payment
which is $7,194.60. Divide 7,194.6 into 100,000 and you get the loan constant of .071946 or nearly 7.2%.
*Calculated with payment due at the end of the period.
Conversely, if you know the loan constant for a particular interest rate and term you can calculate the
payment. So for any 30 year 6% loan with monthly payments you can multiply the loan amount by the
constant .071946 to get the total annual payment and then divide that by 12 to get the monthly payment.
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17.
Christopher on January 23, 2013 12:47 pm
haha indeed the KISS rule (keeping it simple stupid) is usually the best in most cases.
Reply
o
Muah! ha.
I agree. Not to be confused with Stupid Simple. Just Simple, Stupid. Stupid Simple is dangerous, as opposed to his
brother Smart Simple. Have to be smart about it, but being smart doesnt mean it cant still remain (fairly) simple.
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18.
@Ali Loan constant is the payment amount for a loan of $1 at a given interest rate and term. Yes, its usually a long decimal
and there are eyesight-destroying tables of these things you could download. If you know the constant for a $1 loan, you can
multiply it by the actual amount of a loan to get its payment. Very 20th-century method, but in short it is a single numeric
representation of the rate/term.
In one of my books, I have a crafty formula that includes the use of the mortgage constant, and which allows you to calculate
the maximum possible amount that a lender might approve under a set of underwriting guidelines.
@Christopher Sorry to be an old curmudgeon, but the whole discussion of cap rates and NOI is pretty much irrelevant to
single-family houses, and to most 2-4s as well. Those properties are typically not valued for their ability to produce income,
but for their amenities as a personal residence. Hence, the price you pay to buy and the price you receive when you sell will
not be governed by the propertys actual or potential income stream, but rather by comparable sales of similar properties,
adjusted for the subjects condition and amenities. The value tends to rise and fall in step with movement in the
neighborhoods housing market, while the value of a true income property is a function of its income stream.
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o
Sorry, Frank, I cant totally agree with you on that one. What you say is correct that you cant determine the value of
the property ahead of the time you plan to sell it because it will be based on comps rather than income, but you can
definitely (and should) calculate NOI and cap rates when you go to buy the properties because you are buying for
the purpose of getting a return. You have to know what that return is going to be, and you have to know what kind
of deal you are getting when you buy it (cap rate).
Youre right, cap rate and NOI dont matter for a sale later, but it needs to be clear that these numbers DO matter at
some point, specifically the purchasing.
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19.
@Christopher btw, the use of a cap rate applied to NOI as a method of valuation of a true income property does in fact
assume you are an all-cash buyer. Remember, NOI is before debt service. This is how a professional appraiser would
approach the matter, and when you think about it, it makes perfect sense. The value of the property should not be affected
by the kind of financing a particular buyer could obtain. If you had perfect credit, and I were a deadbeat, you might get better
terms, but should that mean the propertys value should change depending on who is buying it.
Going beyond the appraisal issue is the question, At what price the property meet my investment criiteria? Thats when
you want to take into account your financing costs, if any, and do a discounted cash flow analysis over time. Its not just the
number of dollars returned, but also the timing; the latter can have a significant impact on your overall rate of return.
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20.
Christopher on January 23, 2013 1:49 pm
Man my head is starting to hurt. Now I know why people just tell me to get them $500-$600 positive cash flow and be done
with it hehehehe!
Since I am starting to write a novel I am going full circle back to Alis napkin approach:)
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21.
@Ali Actually we dont disagree very much at all I just didnt express myself as clearly or completely as I should have, and
youre raising an important point. In fact its a discussion I often have with my students on the subject of current appraised
value vs. the price the investor should pay to achieve a certain objective.
So, to try to clarify what I bumbled over before: With a single-family house, its appraised market value is based on
comparable sales, not on its ability to produce income. By analogy, with a true investment property (i.e.,commercial or
residential larger than four units), its current market value by standard appraisal technique is its capitalized NOI. The
question that comes up in my grad class usually is, So is that the price is I should be willing to pay as an investor?
The answer is, Not necessarily.
The typical income-property investment scenario is to buy and hold for some period of time. Hence, youre not looking at a
once-shot stream of income (current NOI) but rather an ongoing series of cash flows, including what you hope will be a big
one when you sell. The best way to start the decision process is first to decide on a target IRR. Mid-teens is what I usually see
from our investment analysis customers, but it can be higher or lower depending on the perceived level of risk. Then build a
pro forma for some number of years to hold the property and work backwards to determine what purchase price will allow
you to achieve that rate of return over the holding period.
Youll use cash flow and net sale proceeds for this, rather than just NOI because the financing does have an impact on the
return on your cash investment, as does the timing of cash flows and the overall holding period. Its not uncommon to see
the IRR peak for a certain holding period, but then decline if you keep the property longer.
The short version here (sorry for too many words) is that I absolutely agree that you must try to make a sensible estimate of
your expected return, regardless of the type of property. Where the single-family is different from conventional income
properties, however, is in the fact the your ultimate resale (which is really the last of your cash flows) will not be based on the
propertys capitalized income, but rather on its comparable-sales value as a home. Add your original purchase price should
also not be based on NOI or comparable sales, but rather on the type of DCF analysis I described here. Hence, discounted
cash flow analysis can just about always contribute to your decision-making, but capitalizing NOI doesnt have much of a role
with single-family.
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o
John on September 8, 2013 1:58 pm
Frank,
Can you explain why IRRs sometimes peak for a holding period, but then decline if you keep the property longer?
Thanks!
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22.
David on January 25, 2013 10:28 pm
Wow, I couldnt get through all the comments, so a very interesting topic, nice job!
That said, I think 5% for maintenance/reserves is inadequate. Even if every mechanical system, and the roof, is brand new
(which I doubt, even in a renovated turnkey), then you need to start putting aside 5% per year just to cover reserves. On top
of that, you will have your turn expenses (cleaning, paint, possibly floor replacement and other repairs) that will amount to a
few percentages points, and this correlates directly to the average length of tenancy, and whether you have a peaceable turn
or an eviction. And then there are some inevitable work orders that come up in the course of a year. In short, 10% is the
minimum that I think makes sense unless you are absolutely certain that you plan to sell the property before anything needs
to be replaced (in which case you theoretically get less since buyers will discount the old stuff; I know I pay more for a
house with new mechanicals). So in the end, Id content that 10% is the better (and conservative) number.
Length of tenancy is the key driver. It determines lease-up fees, vacancy rate, and turn expenses. This is one of the factors
favoring single family homes that gets overlooked sometimes. And Id contend that often the stickiest tenants are in the
working class areas, where they tend to be long term renters.
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o
David, you make extremely valid points here. Every investor needs to figure out for himself what he (she) believes
makes sense for how much % to allocate for both vacancy and repairs. You bring up excellent points for additional
expenses in the repairs category to consider.
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23.
Michael on January 27, 2013 12:37 pm
Love the napkin post Ali. I use the quick # approach to determine quickly if I want to dig in more. There is so much to look at
& this helps to weed out a lot in a short time.
Good debate going on here & my head is spinning. LOL. Still love real estate & buying and holding now as well.
Great Job!!!
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o
Thanks, Michael! You totally nailed it. I always scratch out the basics on a napkin or my hand or wherever else is
handy just so I can know if I want to continue to dig in more. If the napkin numbers dont show me anything good, I
can toss the property, with the napkin, into the trashcan.
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24.
JKC on January 30, 2013 7:22 am
Great article Ali! And great discussion in the comments. What I wanted to focus on is the last paragraph of your article and
how location impacts cashflow as you point out with your example of Detroit. In my experience, the worse the location, the
better the numbers. Just keep in mind that those numbers arent free (you have to earn them). If you are in a rough
location, your napkin calculation may look good, but make sure you put your boots on the ground before you buy.
Alternately, in some of the nicer neighborhoods in a given area, the napkin numbers may not look as good, but the unit
attracts nicer tenants and the area is often perceived as less risky in terms of appreciation and resale value.
My rule of thumb is: The nicer the neighborhood, the worse the cashflow.
I believe each investor needs to find a balance of return and risk that is comfortable to him/her.
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o
I cant agree with you more! And I think investors need to understand this. There are always exceptions of course
not every expensive property with lesser cash flow will end up with perfect tenants, and not every cheap property
with huge returns will end up with bad tenants, but its a chances game. Your chances are better with better
properties and worse with the cheaper ones. No doubt. Some investors are fine going the cheap route and actually
make a lot of money doing so. Others dont. Some dont like expensive.
Youre right. Its about everyones individual comfort levels.
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25.
John on January 31, 2013 2:39 pm
I was doing a few calculations and came up as follows
Assumes the following Purchase price 40k / 15 yr mortgage @ 4.25 with 6k down
Gross mo income 650
Expenses
Tax 175/mo
Insurance 50/mo
Mortgage 260/mo
Vacancy 65/mo
Repairs (15) 100/mo
Net Income 0
Cap rate 3120 / 40k 7.8 percent
COC Return 3120 / 6000 52 percent
Is this right? If so, how can net income be zero but cap rate and COC return be high?
Reply
o
Hi John, thanks for sending a sample problem!

So a couple things I see here:
$3,120 is the net income not including the mortgage. Correct. But you should only use this one for the cap rate. So
youre cap rate is correct, because it does not include financing costs.
For the cash-on-cash, you do need to include the financing cost, meaning the zero net income. So essentially you
would be doing 0/6,000 = 0. You are making no money on the money you invested.
Is this a real property you found? What market?
Ali
Reply

So in other words, run from this one
Yes, I live in Sioux City IA. There are several properties available in that range. The monthly rental income
may be slightly low in my example (although I did figure it at 19.5 percent of purchase price). Is that
appropriate? I may have some wiggle room with my banker as well which could affect the numbers.
What term are you figuring your mortgage payment on?
I am searching for my first rental and want to get this right.
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26.
John,
I definitely want to suggest in this case that you work with a local real estate agent or property manager to determine what
the realistic monthly rent should/will be. How did you come up with the 19.5% number? Either way, there is no magic
formula for knowing what you can predict for rents. You can only go off the comparables in the area, and thats where you
need a professional. Especially in this case since you are so close to the fence of having zero net income. Thats a huge
problem if you want this property as an investment.
Remember- First rule of investing: Dont lose money. This house is really close to wanting to break that rule.
As far as mortgage, you can probably lessen the payment by switching to a 30-year but it depends on what is more important
to you. Cash flow or paying it off quicker. Also, where are you getting $6,000 down from? Have your lender provide you with
the definite numbers because Ive never seen a lender do an investment property loan for under 20%, and you are estimating
a 15% down payment. Plus, you are going to have closing costs that need to be factored into your returns equations.
Hope that gives you some ideas to work on. But in general, Id run far away from this property if those are the actual
numbers.
Ali
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o
Julia Pinelo on November 20, 2014 11:53 am
Just wonderingwhere on earth a $40,000 home would cost you over $2000/year in property taxes. That doesnt
seem to me to be a very good area to invest in at all!
Reply
Pro
Ali Boone on November 20, 2014 2:07 pm

Where did you see a $40k house with $2000/year in taxes Julia?
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27.
David on January 31, 2013 3:18 pm
John try to get a 25 or 30-year amortization. Also, your insurance and taxes look ridiculously high. Insurance shouldnt be
more than 1% of your purchase price (annually), and I cant imagine your tax rate there is more than 2.5% of assessed value
(annually). You may need to appeal the assessment upon purchase. In most jurisdictions, it is fairly routine to get the
assessed value knocked down to your purchase price (Detroit may be an exception, for example). The 15% maint is on the
high end of what most would use. Id recommend 10-11% for SFRs in working class neighborhoods, as long as they have been
reasonably rehabbed on the front end, and the house isnt extremely old.
DONT determine rents based on a swap % of the purchase price. You need to do a rent survey, using Craigs List, For Rent
signs, Zillow, rentometer, calling prop mgrs, etc.
A gross yield of 20% or so is pretty decent, its just shy of the exalted 24% target (ie. 2% rule) that everyone chases. Depends
entirely on the quality of the neighborhood and quality of the property whether it is the right target, however. People
routinely buy at 15-18% gross in nice neighborhoods, but lower neighborhoods you wont make a penny if your gross rent
is less than 24%, due to the higher maintenance and greater tenant issues.
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o
Great adds, John! And I agree. The numbers look really off.
Reply

Thanks for the info. My tax numbers come directly from the county assessor page. Property is a foreclosure
assessed at more than 2x listing price. I just guessed on insurance at this point. The 15 percent down figure
comes from meetings I have had at the bank. They are a small, local bank.
What percentage do you figure for closing?
Reply

And you definitely made sure to clarify that this will be a mortgage on an investment property
rather than an owner-occupied property? That makes a big difference for down payments and
interest rates. But if you did clarify that with them and you can definitely do a 15% down loan, that
is awesome and Im quite jealous.
I dont want to give you a % to use in calculating closing costs. You need to get an actual number
from the bank for those. There are some basic %s you could use, but I feel like they will mislead
you. You are safer to get the numbers from the lender. They can give you those.
I caution you in general to be very wary of assigning uniform estimates to any property you look
at. Like assuming the rent will be a % of the purchase price or property value. Or assuming an
exact % of the loan for closing costs. Because success in real estate investing is so dependent on
numbers, always always always try to get exact numbers whenever possible. Because even with
almost all exact numbers, there will always be something to throw those numbers off. So you
want to estimate as accurately as possible to start.
28.
Thanks for your help. Yes my banker knows this is an investment property. Having a good relationship with him and the bank
probably helps. I will get some definite insurance numbers. This is just one I found a very prelimary figuring at this point.
Wanted to make sure I was on the right track. Thank you again.
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29.
Sabrina Laplante on February 5, 2013 5:40 pm
Ali, awesome article!!!! Love how simple you make it. I appreciate the time you take to explain these things to some of us
beginners! What some could say about numbers and them being scary, you show us a very appealing version!! Thank you so
very much, and good luck with everything! Looking forward to reading many more of your blogs on here!!!
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o
Ali on February 6, 2013 12:15 am
Thanks, Sabrina!
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30.
Jacquelyn on February 6, 2013 6:47 pm
Hello Ali:
Maybe I missed it but on the cash-on-cash example, I am not seeing where you got the 4296. I thought that the annual net
was 9168. Thanks
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o
Ali on February 6, 2013 11:33 pm
Hi Jacquelyn! No, you didnt miss it, I just didnt expand on that as well as I should have. Ive had a lot of questions
on it. So for the cash-on-cash return, you want to use your annual net income, but unlike the cap rate you do want
to include financing costs here. So the $4296 is the monthly income, after all expenses including mortgage, times
12. The cap rate number didnt have that mortgage payment taken out of it.
Hope that helps!
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31.
Junior on May 9, 2013 8:25 am
Hey Ali, Great post by the way! Especially amazing for someone like me who is looking to get into the basics of renting
turnkey properties. One question, why when you calculate your cap rate do you exclude the mortgage payment from your
net per year?
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Pro
Hey Junior, love your name

Good question. The cost of money is never calculated into a cap rate. If you
are financing, you always want to go the extra step and calculate that cash-on-cash return because that will account
for the mortgage or financing cost. Cap rates are a measure of a property price versus the income it brings in. That
doesnt include financing. As I like to put it, financing costs are your own problem, not the sellers. And by problem
of course I mean gift from heaven

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32.
Chris K. on May 27, 2013 11:37 am
Ali,
How would i calculate cash on cash return for a property im now renting that was my primary residence for approximately 8
of the last 11 years?
Assumptions:
Total purchase price: $269K in 2002
Total improvements: $31K
Current monthly costs:
*$1,187 Mortage (30yr @ 4.625%)
*$342 Taxes
*$85 Insurance
*$100 Vacancy (this is conservative since weve had, and still, have a great tenant since Day 1)
*$100 Repairs and maintenances (again, very conservative, knock on wood)
Current monthy rent:
*$2,100 (this is low comparative rents are $2,350-2,500)
It seems my cap rate is especially low. Part of my short-term strategy to hold the house while we moved to Woodland Hills,
CA was to let the property re-appreciate, and that seems to have occurred. Worth about $375-425K when we moved almost
3 years ago, the property is worth about $600K right now. My long term plan, however, was to hold the house as income
property, pay it off, and have it in our retirement as an income-producing asset. That is still feasible, but i suspect i need to
reduce current expenses, increase revenue, or both, to make it a good play for my money (return wise). But were also very
seriously considering selling right now to take advantage of the IRS code that allows me and my spouse, filing jointly, a cap
gain exemption of up to $500K for living in the house 2 of the last 5 years. I would clear about $300K tax free in this
scenario.money that could perhaps be reinvested in income property with better returns?
Your or anyone elses thoughts here would be greatly appreciated.
PS i have really benefited from this napkin posting and all the comments and replies, so thank you
Reply
o
Ali on May 27, 2013 9:50 pm
Thanks Chris K.! Glad the article has helped.
Your cash-on-cash return would just be calculated using your net income and how much cash you have actually put
into the house (not how much the total purchase price was, how much you owe, or how much its worth). You cant
really calculate a cap rate on this, I mean you can, but there is no point. Cap rate is only related to buying or selling a
property.
If you have that nice of equity and profit potential, Im in favor of the idea of selling that house and using that profit
to buy properties with higher returns. Multiple properties, higher returns, more tax benefits, etc. Just my 0.02 tho!
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Chris K. on May 28, 2013 8:58 am

Thanks Ali. I only owe $215K on the note now. So, if it was you, you would take the one-time tax savings
huh, and not try to pay down the note aggressively? (goes against your strategy of using leverage to create
positive cash-flow, i know)
Is there a point, in your opinion, in calculating cash on cash return then? i mean, how much money i put in
the house would be difficult to calculate (beyond the improvements i know about, it would be 8 years of
mortgage payments (P&I) and taxes and insurance.and that cant be good for any cash on cash return
calculations).
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Ali on May 28, 2013 5:16 pm

It would only be relevant if you want to keep it as an investment. But it would still only give you a
heads up about the return you are getting on your money, it wouldnt change any of the numbers.
But yes, youre correct, Im a HUGE fan of leveraging and never paying anything off.
33.
Michael Spindler on July 7, 2013 11:07 am
Hi Ali,
Thank you so much for this. Normally formulas boggle my brain and I just shut down. But your intro made it so easy, I actually
started looking at and understanding the more advanced stuff, ROI, NOI, etc This goes along way to answering my own
questions rather than asking for group consensus on a deal.
I am a firm believer in paying myself first and then use the net profits to reinvest. Does anyone else include themselves in the
equation. Ex: Instead of paying a PM, reassign the 10% to self pay? Or even in addition too?
Thanks again!
Sincerely,
Michael
Reply
o
Ali on July 7, 2013 11:26 pm
Hey Michael! You can definitely tweak the numbers any way you want. The net cash after everything on the napkin
is the money that would go in your pocket, but if you want to split that up further somehow, you totally can.
Glad you like it! Thanks for the response.
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34.
Sarah L on August 13, 2013 1:20 pm
Hi Ali,
Thanks so much for posting! This article is so helpful! Im just starting out and this article made all the real estate finance not
so intimidating. I assume this would just be a good starting point to decide if its worth looking into a property more are
there additional formulas I should be looking at?
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o
Ali on August 14, 2013 1:02 am
Hey Sarah. Not that I can think of to start!
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35.
Lisbeth Madrigal on August 15, 2013 4:35 am
Ali,
Great article! I have not yet bought my first investment property but am one day closer. Using this time to continue
educating myself to be a well informed RE investor and minimize my error and maximize my potential cashflow via reading
some of these post. I have found some property evaluators on different sites etc., but I would like to see numbers on extra
principle payments, so if I apply cashflow towards principle payments. Also calculating percentage of tax on that earned
income deducted monthly. I am working on setting these formulas on an excel spreadsheet, etc. Not a math nerd, but like to
know how things work.
Reply
o
Ali on August 15, 2013 12:18 pm
Hi Lisbeth, good for you for getting all set up so you can evaluate properties quickly. One thought for you is to
maybe not worry too much about the tax because if normally your expenses, once written out as write-offs, should
balance out the taxes you would owe on the income. So any house expenses, depreciation, travel expenses, etc. are
usually enough to make it a situation where you wont owe any taxes. Its one of the mega benefits of rental
properties. Look into it though.
Reply
36.
Joe Butcher on August 22, 2013 5:36 pm
Hi Ali,
I know this is an old post, but I have a question, and Im sure it is something I am overlooking, as I am not much for math, but
under the Cap Rate equation, you have your Annual Net as $9168, and under the Cash On Cash equation you have the
Annual Net as $4296, but since the cap rate doesnt include the mortgage shouldnt the Annual Net be LESS??
How did you arrive at $9168?
I know this is something I am overlooking I am sure, so apologies in advance.
Thanks
Joe
Reply
o
Lisbeth Madrigal on August 23, 2013 3:13 am
Morning Joe:
Here you go:
Josh g January 20, 2013 at 7:53 am
The $9168 is the monthly net (cash flow-$358) plus the mortgage payment added (406) then multiplied by 12
months
REPLY
Ali January 21, 2013 at 2:23 pm
Thanks, Josh! You nailed it. Sorry, A.King, I should have clarified that better. I kind of snuck that one in there.
REPLY
Reply
Joe Butcher on August 23, 2013 5:31 am

Thank you Lisbeth..so just to clarify we are INCLUDING the mortgage in our Cap Rate equation, but NOT
our COC, correct?
Thanks
Joe Butcher
Reply
37.
Giovanni Isaksen on August 23, 2013 11:50 am
Joe the standard cap rate is calculated before any debt service, as though you bought the property for all cash. To get the cap
rate you divide the NOI (Net Operating Income which is rents less vacancy plus other income minus expenses) by the
purchase price.
To calculate the cash on cash return you subtract the debt service from the NOI to get your pre-tax cash flow and divide that
by your total cash invested. The cap rate is a better measure of the propertys performance while the cash on cash return is a
measure of your investment results.
For illustrations of NOI, Cap Rate and Cash-on-Cash Return click on my name above and go to the Investment Property
Analysis page on our website.
I highly recommend reading Frank Gallinellis What Every Real Estate Investor Needs to Know About Cash Flow And 36
Other Key Financial Measures . This is the investors bible on analyzing real estate deals and if you know how and when to
use the formulas Frank lays out you will know as much as or more than most RE brokers. Thats key because the difference
between a sales proforma and reality is the difference between success and failure in real estate.
Reply
38.
Genna on September 25, 2013 1:31 pm
Ali,
Can you use COC formula for more than the first year of a property? Does it work to use all the money invested up front in
down payment, then use the net income of the property to figure out what your COC returns are at any point during the
investment?
Reply
o
You definitely can Genna. And its good to. Like if you buy a property and originally calculate 7% for vacancies and
and it is actually 15% once you get into it, you can recalculate and see your actual returns. Now, whether you can do
anything about it then or not is another story. Until you go to sell, what the returns are really dont impact anything,
other than potentially triggering you to want to sell. But yes, you can always adjust. Especially for repairsthey will
only become more and more as you go on.
Reply
o
Giovanni Isaksen on September 25, 2013 4:35 pm
Gemma I would add to Alis reply that while you can look at COC returns every year over time or over a span of years
there are better ways to measure your returns. $100 of cash flow today is worth $100 but $100 of cash flow seven
or ten years from now will not be worth as much because of the time value of money. When looking at property
returns over multi-year spans or the life of the investment measures such as IRR (Internal Rate of Return) or MIRR
(Modified Internal Rate of Return) work better and are favored by those who work with property investments for a
living or whose living depends on those investments.
Reply
39.
Mike Glass on October 21, 2013 7:29 pm
Ali help here,
Hoping to pull the trigger on a deal in the coming days, but I want some feedback if possible. At first when I was doing my
numbers I was certain it was a good deal but lately seems like my numbers are getting clouded by too many opinions. Based
on your plan can you tell me what you think.
Turnkey property (section 8 housing) that I will get once a 1 year lease is signed
Sale price 35,000
Cash at closing $11845
Monthly income $725
Tax $100
Insurance guessing $50
Prop management $80
Mortgage $100
Vacancy $50. ( I know a little lower than %10)
Repairs %30
Napkin test please?
Reply
o
Ali Boone on October 22, 2013 3:52 pm
Hey Mike! Sure, I can try to help. I didnt go through actual calculations on these just because I can tell the numbers
work out fine just by looking at it. Youre basically at the 2% rule already (only using that as a guideline, never a rule)
which pretty much means the numbers will work out.
When you say opinions, are those from other people or your own? I think in this case, you should definitely weigh
any opinions you hear. Remember, while numbers are the most important thing, they arent the only important
thing. With this property being turnkey and that cheap I have hesitations about it without even seeing it. Also, do
you know for sure you can get a mortgage on it? I dont know any lenders who will lend that low.
Reply
40.
Mike Glass on October 22, 2013 4:29 pm
Opinions meaning lots of crazy optimistic opinions and lots of negative ones, they all seem to take their own experiences and
print them as the gospel of real estate investing.
Yes, I was able to qualify through Huntington bank for this loan. I do have cash if needed but I really would like to use the
banks money. Yes the houses are section 8 and location is not great but with it being section 8 Im banking on the success of
a close family friend who manages @200 of these as well as owns many as well. I know the appreciation probably wont be
great but Im really in it for the passive income and tax breaks. Am I thinking about this the wrong way? Its a 3br, 1.5 bath,
no basement. This was appealing as I hope repairs are kept to a minimum. Again Im very to new to this and want my deal to
be good. I have several others just like this lined up to look at so this is the target market I seem to be headed toward.
Thanks for the quick reply
Reply
o
Ali Boone on October 22, 2013 9:15 pm
Hey Mike, sounds like you are on a smart path with it! Im usually pretty big at knocking cheap property investing
but it sounds like you have the right team in place and it could work for you. Id go for it!
Reply
41.
Donald M on November 10, 2013 4:21 pm
Not sure if anyone brought this up, but how do you account for personal federal and state income taxes? Why doesnt the
cash on cash return factor this in, if youre going to have to pay 20%-35% on your income? Do people not factor this in with
respect to real estate investments? Thanks.
Reply
o
Ali Boone on November 11, 2013 6:45 pm
Hey Donald, no its not factored into rental properties because if done right, for the most part rental income endsup being tax-free income, essentially. All of the write-offs, and the big one being depreciation, ends up usually
equaling pretty close to what taxes would run, so it balances out to be tax-free income.
That is not however true for active income investments, such as flipping.
Reply
42.
Eric on December 5, 2013 10:05 am
Forget about all the numbers and ROI. If you have had two back-to-back evictions, you need to get some education in tenant
screening. You obviously do not know how to screen tenants.
As an experienced landlord, with 25 current renters, you need to look at credit score and know what it means. It means more
than a criminal record ever could. Income tells me the renters ability to pay, credit score tells me the renters desire to pay.
With the national average renter credit score at ~658, anything below that and you are taking in a BELOW average renter.
Stay above 620 and you will have fewer issues. If you take in a renter paying more than 30% of their gross income in rent, and
a sub-600 credit score, you are a fool.
Reply
o
Ali on December 5, 2013 12:34 pm
Thanks, Eric. I dont landlord properties myself though and I wasnt the one who put those tenants in. The property
managers I had working the property were absolutely horrible, unbeknownst to me in the beginning, and theyve
since been fired and I have a great manager (who knows what he is doing) taking care of the property.
Tenants will make or break an investment property all day long. Bad tenants = cost a fortune. Its up to the
landlord/manager to find the good people.
Reply
43.
Matt Henderson on March 2, 2014 5:03 am
Hello,
I have a rental property that Ive owned since 2007, and recently sat down and attempted to analyze the investment, to
determine whether I should continue with it, or sell it and deploy the proceeds into other investment vehicles.
The property equity, right now, is what I consider is the capital that could otherwise be invested in an alternative investment,
and that brings me to the first point: Shouldnt current value be used in the above calculations, as opposed to purchase
price? (Or at least, should it be used in my context?)
Second, the mortgage payment is comprised of two components: Interest and principle. The interest is an expense, but the
principle payment increases my equity in the property. So my second question is whether that increase in equity over the
year (due to the principle portion of the mortgage payments) should be taken into account in an analysis?
Thanks so much.
Reply
o
Ali Boone on March 2, 2014 7:51 pm
Hi Matt, thanks for reaching out. For your first question, no the value on a house doesnt even matter if you arent
going to sell it (or buy it), and it doesnt matter unless its what you sell or buy for. The only price that matters is the
one you will actually buy it or sell it for, regardless of the true value. For the second one, regardless of what is what
in the mortgage payment and the equity you are building, that set amount is still an expense for the month. It
doesnt matter what its doing to the value of your investment, it affects your monthly cash flow the same way
regardless. Hope that helps.
Reply
o
Paul on May 17, 2014 12:44 am
Matt,
If your question is whether it would make sense to sell the property and deploy the proceeds elsewhere, then
absolutely the relevant number is the current market value of the property, not the capital cost. So I disagree with
Ali on this point. It doesnt matter if the cap rate looks great because your initial investment was low; if you are
sitting on a meaningful capital gain, it might make sense to sell.
In fact, since the average yearly return for the S&P has been about 8% historically, you cant easily justify keeping a
property that generates any less. (The fact that its so easy to make money in the stock market is precisely why I
havent gotten involved with all the hassles of real estateat least not yet.)
Now on to the second question: thats exactly why the cap rate doesnt take financing into consideration. Youre
making a return, and the cap rate simply tells you that return; whether you decide to plow part of it into a mortgage
payment is your business and isnt related to the performance of the investment itself. But by the same token the
cap rate doesnt reflect your degree of leverage, so for that theyve devised cash-on-cash. If your strategy is to focus
on paying down your debt rather than logging a large monthly cash flow, then you could have a zero cash-on-cash
and still be increasing your net worth by building equity in the property. Just not a strategy that most real estate
investors favor.
Reply
44.
kris on March 7, 2014 12:44 pm
What if you assume the existing mortgage on a property? What number do you use for the Cash-On-Cash to divide by?
Reply
Pro

Hey Kris. Whatever money you put into the deal should be in the denominator.
Reply
45.
MAY LE on April 11, 2014 2:22 pm
Hi Ali,
Thank you so much for great information. So, base on your calculation, I set the cap rate as 7% as my goal, and calculate
backward to find the ideal purchase price range.
However, I have been looking for houses for 6 months, and as far as I know, theres no house that under $200,000 can rent
out for $1300. Only condo or townhome can have that price, however their HOA is usually high ($250/month). So, Im not
saying that the numbers you give are not realistic, but I just wonder how you find such a good deal house that is low price, no
HOA, and high rent. Maybe I have been searching for houses in the wrong way.
Please advise.
Reply
o
Hi May, thanks for writing. Chances are the issue is the market you are looking in. There are a lot of markets that
have plenty of houses for say $150k and rent for $1300. Let me know what market you are looking for those in
currently.
Reply
46.
Griff on April 30, 2014 9:15 pm
Ali,
One quick question. In your napkin figuring when looking at potential investments, do you typically use a percentage of the
purchase price to estimate closing costs? It appears in your example for Cash to Close you had 20% down and then tacked
on an additional $5K for closing costs (roughly 5% of $94,500).
Much appreciated post and thank you.
Reply
o
No Griff I dont usually go off of a set % of the purchase price. I used that $5k ballpark just based on what I had seen
at the time, but I would definitely recommend clarifying with your lender how much exactly in closing costs you will
be looking at. You could even get a ballpark to start and then confirm exact numbers later with him if thats easier.
Its hard to say an exact % because lenders will vary in their fees. Not drastically, but I would always just ask them for
what number to use.
Reply
47.
Jessica G on May 7, 2014 6:57 am
Let me start this with a caveat, Im not a huge fan of mathbut I know I have to understand it, especially in the world of
investing.
With that being said, Im still stuck on the napkin calculations. From reading the article, I was thinking the equation for the
cap rate would be $4296 ($35812) / $94,500 = 4.5%
and the cash on cash equation would be $9168 ($358+40612) / $23,900 = 38.35%
but the numbers on the napkin were different.
Clearly, I missed something. Could you point me in the right direction and tell me where I messed up?
Reply
o
Hey Jessica, great question! I realize I didnt clarify well on those equations. You have it almost exactly right, but
switch which equation you involve the mortgage payment in. The cap rate is not calculated with a mortgage
payment, so its that one where you would do the ((358+406)*12)/94,500. You are just subtracting out the
mortgage from the expenses, as you did for the cash-on-cash. The cash-on-cash needs to include that mortgage
payment as an expense so that one stays $358, so (358*12)/23,900.
Does that make sense?
Reply
48.
Carrie on July 2, 2014 12:52 pm
Thanks for the unique strategy of using a napkin! I really enjoyed the way you broke down each step for an easier
understanding. If youre looking more into RVs and Cash Flow equations, check out one of our podcasts at
hartmanmedia.com!
Reply
o
Ali on July 3, 2014 11:21 am
Thanks Carrie!
Reply
49.
Matt Svajda on July 7, 2014 2:00 pm
Ali,
Are you still seeing this figures in todays market? Im in SoCal and have been looking at rentals in the desert area, but the
numbers have been shifting. Where else are you seeing this napkin return?
M
Reply
o
Ali Boone on July 9, 2014 3:35 pm
Ive definitely never seen those numbers anywhere in SoCal, Matt. At the time I did the article, that was an Atlanta
property but its doubtful youd see those there now. It depends a lot of what kind of property you are looking for.
Distressed properties and lower-priced properties will yield those numbers a lot easier. So it really depends. You can
see those numbers in Philly for sure, mayybe Houston but probably not quite there and the CoC wouldnt be there.
Chicago.
Reply
50.
Ken on September 29, 2014 1:37 pm
Ali,
So I am currently still trying to get the hang of the evaluating process. So my question is why didnt you include water,
sewage, trash,etc In the expenses? Wouldnt that then give you your true cash flow? Or is this just a screening process and
you use a much more in-depth analysis later on?
Reply

Good question Ken. No, the only time I would include the utilities as expenses is if I would be the one paying them
(i.e. the owner). Typically tenants pay for all of those themselves, so it would not be an expense to me. More with
multi-families or condos or apartments you might see owner-paid utilities. If I am looking at a property, I will ask if I
would be responsible for those as the owner and if the answer is yes, I will include them in my calculations.Same
with HOA. A lot of properties dont have an HOA fee, but if one does, I will include that as an expense.
Ultimately, if you are analyzing a property, you should be fully aware of all the running expenses that you will be
responsible for. And then, be sure you include all of those in your calculations to make them more accurate.
Whatever the expenses may be, include them. But typically the owner is responsible for utilities.
Reply
51.
Pro
Why isnt the the electricty and water added in under the expense? I know the tenant will pay it but does this fall under the
vacancy?
Reply
Pro
Ali Boone on January 20, 2015 4:05 pm

Ayodeji, thats a good thought. It could be included, for sure. I really hadnt thought of it. Usually those expenses are
very minor, if much at all. Depends on the location and time of year. Although those expenses could just be included
in the estimate % for vacancy.
Reply
Pro
Ayodeji Kuponiyi on January 20, 2015 5:08 pm
Thank you for replying Ali. After reading your blogs, it became painfully clear (due to lack of knowledge and
awareness of proper real estate investing) I bought a property that is bringing a very low cash-on-cash
return. I plan to move out of one of the units to buy a single family house. I plan to rent the top unit (I have
a prospect tenant who agreed to $915 rent.)
This is the breakdown:
Property: $154K (2 units) Duplex
Unit 1 $900/month, Unit 2 $915/month Total: $1,815
EXPENSES
Property tax is $4,630 divide by 12 = 385 I round up to $400/month
Insurance $68/month
Vacancy (10%) $182
Repairs (10%) $182
PM $182
No Mortgage
INCOME EXPENSE ($1,815 $1,065) $801Cash Flow
CAP RATE = Annual Net/Purchase ($1,001/$154K) = 0.65%
CASH-ON-CASH $801/$154K = 0.52%
Reply
Pro
Good news Ayodeji, you have an error in your numbers that actually results in your favor. You
used the monthly net income instead of the annual income. So instead of $801, you want to use
$801*12=9612. So then put that in the equation and you get 9612/154000=0.0624, so a 6.2% cap
rate. Thats not bad at all! And if you dont have a mortgage, your cash-on-cash is the same- 6.2%.
Not a bad investment!
Paul on January 20, 2015 5:38 pm

Electricity and water shouldnt amount to much if the unit is vacant.
Reply
52.
Pro
Ayodeji Kuponiyi on January 20, 2015 8:54 pm
Oh wow youre right I missed that. Thanks for the correction. Isnt a cap rate or cash-on-cash of 8% or higher better though?
Reply
53.
Pro
Ayodeji, it depends on the situation. If its the same property and you are comparing 6% to 8%, then yes. But if to get 8% you
have to take on a riskier property, then not necessarily because realistically you may never actually get 8%. Its all a trade-off
on risk vs. return. The riskier the investment, the less likely you are to actually collect the projected returns. And if the 6% is
way less risky, whats 2 percentage points in the long-run? Not a lot.
Reply
Paul on January 21, 2015 12:27 am

My concern about a cap rate in the ballpark of 6%, especially for someone purchasing without a mortgage, is that
there are several solid real estate investment trusts offering a comparable dividendand they come with zero
landlords headaches and unparalleled liquidity. No worrying about whether youll be able to unload your property,
and of course no realtors fees! Even staid old AT&T was flirting with a 6% dividend during the markets swoon in
October. It has retreated somewhat since then (the yield is about 5.6% as of this writing), but the point is that with
any capital appreciation at all, it will outperform a real-estate investment that has a cap rate of just 6%. And all you
do is sit back and watch the dividends roll in quarterly.
In order to compete with the stock market, a real-estate investment needs a cap rate of at least 8-10%. Otherwise
the return scarcely justifies all the time and effort that youre going to have to put into managing your property.
Reply
Pro

Good points Paul, but remember, that cap rate is only referring to just the cash flow off of a property.
Thats not the only money you make with a rental property. You have the tax benefits (which turn out to be
substantial each year in most cases), you have appreciation, and you have equity build (whether
appreciation happens or not). All of those pan out to be a significant amount of money, on top of just the
6% you make in cash flow.
That is a trade-off with the security/safety of a trust.that income is guaranteed and no tenant issues or
offloading complications, but you also miss out on major financial benefits that you get if you own the real
property.
Reply
Paul on January 21, 2015 9:06 pm

Ali,
I can see your points for someone purchasing with a mortgage, but Ayodeji said he didnt have a
mortgage, so the tax benefits are going to be negligible and hes not building equity. Besides, if he
did have a mortgage, he would not be building equity AND collecting 6% a year. Its one or the
other.
Paul
54.
Pro
1) To add to the Expense: Lawn Care/ Snow Removal. For me, lawn care is $60/month which brings my cap rate down to 5%.
Question.
2) As a Landlord in my current duplex, do I have to pay for water? Even after I completely rent out my units? Currently I pay
for water.
Reply
Pro

Im not sure Ayodeji Ive never landlorded or rented out anywhere Ive lived, so not sure the logistics on that one. I
would assume so for an MFR because its one bill.
Reply
55.
Pro
Paul, he is still getting major tax benefits. Depreciation is one of the biggest tax factors involved with rental properties.
Mortgage interest is a big one, but that one isnt near as good as depreciation because you still have to pay out in order to
get the interest write-off (i.e. pay the mortgage interest in the first place and then write it offyou dont get it all back, only a
portion). Rental property income can usually be made to be tax-free income because of the write-offswith or without the
mortgage interest, depending on the numbers and such, mostly because of depreciation. Rental properties are the only
income-producing asset where you get both depreciation and appreciation at the same time, and can collect money on both
of those. And you are still building equity back whether you have a mortgage or not because you are paying down what went
into the property. You can then use that equity again later.
Reply
o
Paul on January 22, 2015 9:51 am
Ali,
Thats a good point about depreciation. Dividends offer a tax advantage too, namely that theyre taxed at a much
lower rate than ordinary income (though REIT dividends are typically taxed at an effective rate somewhere between
that of qualified dividends and ordinary income).
One other point about REITs: they allow an investor to get involved in real estate while committing much less
capital. You can open a position for virtually any amount (and keep contributing to it, if you wish, at your own pace)
instead of the $50,000-100,000 minimum investment that youd usually need for a rental unit.
Thanks for this very thought-provoking blog!
Paul
Reply
56.
Pro
Ayodeji Kuponiyi on March 9, 2015 12:23 pm
Is the mortgage included in the cap rate? For instance, when Im calculating my expenses with the mortgage included and I
subtract the expense from the rental income, Im left with the cash flow. Do I mutiply the cash flow by 12 OR do I add the
cash flow plus mortgage and then multiple by 12 to get the Cap Rate?
Monthly Rent $1860
Expenses: Prop Tax $400, Insurance $85, Vacancy(10%) $186, Repairs(10%) $186, Mortgage $575, PM(11%) $260 Total:
$1,632
Cash flow: $1860-$1057= $228
Cap Rate 8.03%
Is this correct?
Reply
57.
Pro
No mortgages in Cap Rate, Ayodeji.
Reply
58.
Neil Schoepp on March 10, 2015 3:46 pm
Ali,
Thanks for taking the time to put this together. It makes perfect sense to me. I am new to the numbers and this is EXACTLY
what I needed to read. Your the best.
Reply
Pro
Thanks, Neil! I dont think Im the best, but Ill take it

Reply

Paul on March 10, 2015 9:02 pm
Ali, its a very helpful page and you deserve the credit!
Reply
59.
Pro
Well in that case Paul, Ill take it

Reply
60.
Plus
Brad McCulloch on March 12, 2015 8:01 am
Just came across this blog and very helpful to those like myself who arent too good at arithmetic or ciphering.:) Thanks Ali.
Reply
Pro

Haha. Youre welcome, Brad!
Reply
61.
Scott on April 14, 2015 9:36 pm
I bought my first 4 plex today for $115. All rented at $525 a month. My realtor is newer and told me that the 17% was
outstanding. Thanks for the explanation.
Reply
Pro
Ali Boone on April 15, 2015 11:24 pm

You bet, Scott! And congrats on the property!
Reply
62.
Jeffrey Goers on April 19, 2015 8:01 pm
Fantastic post, thanks so much. I was doing everything except including the costs of repairs and vacancies. I also am buying
fully rehabbed turnkey properties, so I will use the 5% value for repairs.
jeff
Reply
Pro

Awesome Jeff! Just make sure to have an inspection done on the property to confirm it really is in good freshly
rehabbed (and quality) condition so the 5% wont be too far off (check roofs, water heaters, AC, etc.)
Reply
63.
Robert Peternel on April 22, 2015 7:40 am
This has helped me with my first property and good news is that all I am seeing are positive numbers!!! Thank you for the
great step by step direction!!!!
Reply
Pro
Youre welcome Robert, and glad to hear you have positive numbers!
Reply
64.
Thomas Hubbard on July 8, 2015 9:01 pm

2 1/2 years later and people are still benefitting from this post. Great job Ali. I just signed up on BiggerPockets so pardon me
not having a picture yet. Anyway I refinanced a house Id been living at for 7 years and now have it rented out so Im
struggling a bit on the cash on cash calculation. When I did the refi my closing costs were $1867. My annual net on the
property will be 4500. 4500/1867 is giving me a wacky value of 241% cash on cash return. I must be doing something wrong.
Do I need to go back in time and figure out my initial closing costs (7 years ago) and factor them into this calculation? @Ali
Boone

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Rental Property Numbers so Easy You Can Calculate Them on a Napkin

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July 28, 2015 2

July 28, 2015 10

July 27, 2015 8

start all over again

quite as stellar of a nerd ranking, but at least I was trying

Brain Helfrich on May 23, 2013 5:16 pm

Ali Boone on September 25, 2013 3:14 pm

Remrie on January 20, 2013 4:37 pm

Mark on January 21, 2013 10:42 am

Ali on January 21, 2013 2:24 pm

Ooh, Dennis, great note. Yes, 0.2652 is definitely a bummer of a deal!

Giovanni Isaksen on January 22, 2013 8:03 pm

Ali on January 22, 2013 10:43 pm

Giovanni Isaksen on January 23, 2013 11:19 am

making sure to multiply by 100

Giovanni Isaksen on January 24, 2013 8:58 am

Hi John, thanks for sending a sample problem!

John on January 31, 2013 3:07 pm

Ali Boone on November 20, 2014 2:07 pm

Ali on January 31, 2013 4:21 pm

Hey Junior, love your name

of course I mean gift from heaven

Chris K. on May 28, 2013 8:58 am

Ali on May 28, 2013 5:16 pm

Joe Butcher on August 23, 2013 5:31 am

Ali Boone on March 7, 2014 8:03 pm

Ali Boone on September 29, 2014 1:58 pm

Ali Boone on January 20, 2015 4:05 pm

Paul on January 20, 2015 5:38 pm

Paul on January 21, 2015 12:27 am

Ali Boone on January 21, 2015 7:27 pm

Paul on January 21, 2015 9:06 pm

Ali Boone on January 21, 2015 7:24 pm

Ali Boone on March 10, 2015 8:55 pm

Thanks, Neil! I dont think Im the best, but Ill take it

Well in that case Paul, Ill take it

Ali Boone on March 13, 2015 8:13 pm

Ali Boone on April 15, 2015 11:24 pm

Ali Boone on April 23, 2015 1:47 pm

Ali Boone on April 23, 2015 1:48 pm

Thomas Hubbard on July 8, 2015 9:01 pm

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