Property investment return: How we calculate
Estimate cash flow, debt and sale outcome for one property investment.
How we calculate
Start with your cash paid for the purchase: the down payment, acquisition costs and renovation. Each year, subtract vacancy losses and operating costs from rental income. This gives rental income after operating costs (NOI), before loan payments and tax. Subtract loan payments to obtain the owner’s annual cash flow.
At the end of the holding period, sell the property at the price implied by the entered annual price growth. Deduct selling costs and the remaining loan balance. These net sale proceeds are already included in the final-year cash flow; do not add them twice.
Modelled annual return on your cash (IRR) is calculated from the initial outlay and all these annual cash flows. It is not an average of annual percentages. To obtain cash flows valued today, less initial outlay (NPV), discount future net cash flows at the entered required return and subtract your initial cash outlay. This measure accounts for when money is received and is not the same as ordinary total profit.
Loan-payment coverage (DSCR) = rental income after operating costs / first-year loan payments. A value of 1 means that income equals those payments. First-year return on your cash (Cash-on-cash) = first-year rental cash flow after loan payments, excluding sale proceeds, / your initial cash outlay × 100%.
Taxes are excluded. Annual cash flows occur at year-end; rent and operating costs stay at their entered levels.
What the figures mean
- Rental income after operating costs (NOI)
Rent received less property operating costs. Loan payments and taxes have not yet been deducted.
Simple example: Annual rent of €12,000 less €3,000 of costs leaves €9,000 before debt payments and tax.
- Calculated annual investment return (IRR)
The annual rate at which future cash flows valued today equal the initial outlay. It is a scenario calculation, not a guaranteed rate; some cash-flow patterns have no unique result.
Simple example: Invest €100 now and receive €120 one year later: the calculated return is 20%.
- Cash flows valued today, less initial outlay (NPV)
Future receipts and payments are valued today using the chosen required return, then the initial investment is subtracted. This is not the undiscounted profit.
Simple example: Invest €100 today and receive €120 after one year at a required 10%: 120 / 1.10 − 100 ≈ €9.09.
- Debt payment coverage (DSCR)
Rental income after operating costs divided by debt payments for the same year. It is a ratio, not a percentage; taxes and capital spending are excluded.
Simple example: €9,000 income divided by €6,000 debt payments gives 1.5 times coverage, not bank approval.
- Annual cash return on your own investment (Cash-on-cash)
Yearly cash after operating costs and debt payments divided by your own initial investment. Property sale proceeds are excluded; this model calculates it before tax.
Simple example: €3,000 annual cash on €30,000 of your own money gives a 10% cash return.
Example: rent and sale without a loan
Purchase price and down payment are €100,000. Acquisition and renovation costs are zero. Rent is €600 per month and operating expenses are €100 per month; other annual expenses and vacancy are zero. The holding period is one year; the loan term is 12 months, and loan interest, price appreciation, selling costs and required return are zero.
Annual operating income is (600 − 100) × 12 = €6,000. There are no loan payments. The property sells for €100,000 at year end, so the final cash flow is €106,000. The initial investment is €100,000; total profit and NPV at a zero discount rate are €6,000, and IRR is 6%.
Do not count the sale twice
The final year’s cash flow already includes net sale proceeds. Sale price is neither rent nor profit: selling costs and the remaining loan must be deducted. This simplified example excludes taxes. Appreciation and vacancy are assumptions; positive cash flow does not guarantee the same future return.