Income formulas
Income formulas turn rent into net operating income, the figure almost every other measure starts from.[1]
| Measure | Formula | Example |
|---|---|---|
| Gross potential income (GPI) | Scheduled rent × 12 + other income | $2,500 × 12 + $600 = $30,600 |
| Effective gross income (EGI) | GPI − vacancy and credit loss | $30,600 − 5% = $29,070 |
| Net operating income (NOI) | EGI − operating expenses | $29,070 − $9,070 = $20,000 |
| Operating expense ratio | Operating expenses ÷ EGI | $9,070 ÷ $29,070 = 31.2% |
| Before-tax cash flow | NOI − annual debt service | $20,000 − $15,000 = $5,000 |
| Break-even ratio | (Operating expenses + debt service) ÷ GPI | ($9,070 + $15,000) ÷ $30,600 = 78.7% |
NOI excludes debt service, depreciation, amortization and the owner's income tax.[1] Agency lenders also subtract a replacement reserve below NOI before measuring debt coverage.
Valuation formulas
Valuation formulas link a property's income to its price.[3]
| Measure | Formula | Example |
|---|---|---|
| Cap rate | NOI ÷ value | $20,000 ÷ $320,000 = 6.25% |
| Value by direct capitalization | NOI ÷ cap rate | $20,000 ÷ 6.25% = $320,000 |
| Gross rent multiplier (annual) | Price ÷ gross annual rent | $320,000 ÷ $30,000 = 10.7 |
| Gross rent multiplier (monthly, appraisal form) | Price ÷ gross monthly rent | $320,000 ÷ $2,500 = 128 |
| Gross rental yield | Annual rent ÷ price | $30,000 ÷ $320,000 = 9.4% |
| Net rental yield | (Annual rent − annual costs) ÷ price | ($30,000 − $10,000) ÷ $320,000 = 6.25% |
| DCF value | Σ NOIt ÷ (1 + r)t + net sale price ÷ (1 + r)n | See the worked example |
The U.S. appraisal report for 2–4 unit properties multiplies gross monthly rent by the GRM,[8] while many investors quote the multiplier on annual rent; the two differ by a factor of 12. Net rental yield and cap rate are the same idea under two names.[7]
Financing formulas
Financing formulas size the loan and test whether the income can carry it.
| Measure | Formula | Example |
|---|---|---|
| Monthly payment (P&I) | P × r ÷ (1 − (1 + r)−n), r = rate ÷ 12, n = months | $200,000 at 6%, 360 months = $1,199.10 |
| Loan constant | Annual payment ÷ loan amount | $14,389 ÷ $200,000 = 7.19% |
| Loan-to-value (LTV) | Loan ÷ value | $240,000 ÷ $320,000 = 75% |
| DSCR | NOI ÷ annual debt service | $20,000 ÷ $15,000 = 1.33× |
| Maximum loan at a target DSCR | Loan whose payment = NOI ÷ target ÷ 12 | $20,000 ÷ 1.25 ÷ 12 = $1,333 a month |
| Break-even cap rate | LTV × loan constant | 75% × 7.98% = 5.99% |
The payment formula is the standard amortization formula taught in finance courses.[6] The loan constant always exceeds the interest rate because it includes principal.[5] Fannie Mae's multifamily DSCR divides net cash flow after the replacement reserve by debt service.[2]
Return formulas
Return formulas measure what your cash earns, over one year or the whole holding period.[4]
| Measure | Formula | Example |
|---|---|---|
| Cash-on-cash return | Before-tax cash flow ÷ cash invested | $5,000 ÷ $90,000 = 5.6% |
| Total ROI | (Cash flow + net sale proceeds − cash invested) ÷ cash invested | See the investment property calculator |
| IRR | Rate r where −investment + Σ CFt ÷ (1 + r)t = 0 | −$100 now, +$110 in a year: 10% |
| NPV | Present value of future cash flows − price | Positive means the return beats your discount rate |
| BRRRR cash left in | Cash in − (ARV × LTV − old loan − refinance costs) | See the BRRRR calculator |
| 1% rule | Monthly rent ÷ (price + repairs) ≥ 1% | $2,000 ÷ $200,000 = 1% |
Cap rate and cash-on-cash are one-year measures; they ignore later cash flows and the sale.[4] The cap rate vs cash-on-cash guide shows how far apart they can be on the same property.
All of the income, financing and return rows above are built into the downloadable rental property spreadsheet.
U.S. tax formulas
Tax formulas convert cash results into taxable ones.
| Measure | Formula | Example |
|---|---|---|
| Annual depreciation | Building basis (no land) ÷ 27.5 | $275,000 ÷ 27.5 = $10,000 |
| First-year depreciation | Annual × (12 − month + 0.5) ÷ 12 | Placed in service in April: $10,000 × 8.5 ÷ 12 = $7,083 |
| Taxable rental income | Rent − operating expenses − mortgage interest − depreciation | See the rental income calculator |
| Adjusted basis | Cost + improvements − depreciation | $330,000 + $25,000 − $72,000 = $283,000 |
| Gain on sale | (Sale price − selling costs) − adjusted basis | $493,500 − $283,000 = $210,500 |
Residential rental property is depreciated straight-line over 27.5 years with the mid-month convention, and land is not depreciable.[9] Depreciation reduces the property's basis.[10]
Why the order mattersMost mistakes come from mixing levels: putting the mortgage into NOI, counting taxes both in expenses and in the payment, or comparing a cap rate (no loan) with a cash-on-cash return (with a loan). Work top to bottom: income, NOI, then financing, then return, then tax.
Frequently asked questions
What is the formula for cap rate?
Cap rate = net operating income ÷ property value. $20,000 of NOI on a $320,000 property is 6.25%.
What is the formula for NOI?
NOI = gross potential income − vacancy and credit loss − operating expenses. It excludes mortgage payments, depreciation and income tax.
What is the formula for DSCR?
DSCR = net operating income ÷ annual debt service. Agency multifamily loans generally require at least 1.25.
How do you calculate cash-on-cash return?
Divide annual before-tax cash flow (NOI minus debt service) by the total cash invested: down payment, closing costs and initial repairs.
Sources
- 203.01 Underwritten Net Cash Flow (Multifamily Selling and Servicing Guide, Part II, Ch. 2)
- 203.02 Underwritten DSCR (Multifamily Selling and Servicing Guide)
- Etter, W. E. Direct Capitalization Versus Discounted Cash Flow Analysis (Publication 1051)
- Etter, W. E. Expected Rate of Return: More than Interest (Publication 1145)
- Etter, W. E. Calculating Mortgage Loans (Publication 923)
- L13: Loan Payments, Credit Cards and Mortgages (Math 141 course notes)
- Anari, A. Profitability of Texas Homes
- Small Residential Income Property Appraisal Report (Form 1025 / Freddie Mac Form 72)
- Publication 527 (2025), Residential Rental Property
- Topic no. 703, Basis of assets