Calculator Methodology & Formulas

Rental cash flow

• NOI = gross rent − vacancy − operating expenses
• Cash flow = NOI − principal-and-interest debt service
• Cap rate = annual NOI ÷ purchase price
• Cash-on-cash return = annual cash flow ÷ cash invested
• DSCR = NOI ÷ debt service

Operating expenses include the amounts entered for taxes, insurance, HOA, repairs, capital reserves, management, and other recurring costs. Principal and interest are calculated with a standard fixed-rate amortization formula.

Residential rental depreciation

• Depreciable basis = (purchase price − land + building basis costs + pre-service improvements) × rental-use percentage
• Normal full-year depreciation = depreciable basis ÷ 27.5
• First-year recovery months = 12.5 − placed-in-service month
• Annual remaining basis = depreciable basis − cumulative depreciation

The estimate uses U.S. residential rental building treatment under the General Depreciation System: straight-line depreciation over 27.5 years with the mid-month convention. The complete schedule uses exact half-month periods and allocates rounding so cumulative depreciation does not exceed the entered depreciable basis.

Sell versus rent

• Net sale proceeds = value − mortgage − selling costs − prep costs − estimated capital-gains tax
• Rental equity = projected home value − projected mortgage balance
• Rent-path wealth = rental equity + future value of monthly rental cash flow
• Sell-path wealth = future value of net sale proceeds

The model amortizes principal and interest monthly, stops debt service after payoff, grows rent and fixed operating expenses independently, and compounds monthly cash flow at the return entered by the user. A PITI-only payment is separated into estimated P&I and escrow using the balance, rate, and remaining term.

Buy another rental versus pay down debt

• Paydown path = current property value + invested excess cash − remaining target debt
• Buy path = current property value + cash + new rental value − current and new rental debt

Both paths use the same monthly surplus, projection window, current-property appreciation, and return on unspent cash. The new rental path separately grows property value, rent, and operating expenses and amortizes the new loan each month.

Net worth projection

• Next month net worth = current net worth + monthly return + contribution
• Monthly return rate = annual return ÷ 12

Contributions are added at the end of each month. A negative starting net worth is allowed; the calculator does not apply a positive investment return until net worth becomes positive.

Timing and rounding conventions

• Annual rates are divided by 12 and applied monthly.
• Mortgage interest is calculated on the opening monthly balance.
• Cash flows and balances are rounded to the nearest cent monthly.
• Depreciation schedule rows are allocated from exact half-month periods and rounded to cents without exceeding depreciable basis.
• Calculator percentages are planning assumptions, not forecasts or guaranteed returns.

Limitations and authoritative references

These tools are educational estimates, not investment, lending, legal, or tax advice. They do not prepare tax returns or model passive-loss limits, depreciation recapture, transaction timing, lender qualification, or every local cost unless you enter an estimate. Review the full disclaimer before using a result for a real decision.

• The Consumer Financial Protection Bureau explains PITI and the difference between loan payments and escrowed costs.
• The IRS Publication 527 covers U.S. residential rental income, expenses, repairs, and depreciation rules.
• The Investor.gov compound interest calculator is a useful independent check for simple contribution and return projections.