Is this rental property a good investment?
A rental pays you in two ways: monthly cash flow, and the profit when you sell. Enter the price, your down payment, the mortgage rate, the rent, monthly expenses and how long you'll hold it. The example buys a $300,000 rental with 25% down at 7%, rents it for $2,400 a month with $700 a month in taxes, insurance and upkeep, and sells after 10 years. It makes $83 a month in cash flow at first and a yearly return of about 11.1%.
Cash flow is what's left each month. We take the rent, subtract 5% for vacancy, then take off your expenses and the loan payment. Here, $2,400 less 5% is $2,280. Less $700 in expenses and a $1,497 loan payment, that leaves $83. Rents and costs rise 3% a year, so cash flow usually grows. Because you put in $84,000, including closing costs, that first year's cash flow is a 1.19% cash-on-cash return.
The sale often matters more. The property grows 3% a year in value, and every payment cuts the loan. After 10 years and 6% selling costs, the sale leaves about $185,907 after paying off the loan. Add $37,723 in cash flow and subtract the $84,000 you put in, and the total profit is about $139,630. The IRR turns that into a yearly rate, so you can compare it with other investments.
Watch the assumptions. With no appreciation, the same deal returns about 4.7% a year. At $2,600 rent, it returns about 13.3% and makes $273 a month at first. Leverage cuts both ways: borrowing raises your return when the property earns more than the loan costs, and lowers it when it doesn't. Choose "Edit them" to change vacancy, appreciation, rent growth and transaction costs.