Direct Answer
The Rental Property Hold-Period Return Simulator projects year-by-year effective gross income, net operating income, pre-tax cash flow, and debt-service coverage from a user-supplied purchase, financing, and operating scenario, then computes levered IRR and equity multiple at a user-defined exit. All results are pre-tax; no live data is used.
Rental Property Hold-Period Return Simulator
Simulator
What this simulator calculates
The simulator projects rental property returns across a user-defined hold period. For each year it computes:
- Effective gross income (EGI): scheduled rent minus vacancy loss, plus other income.
- Net operating income (NOI): EGI minus operating expenses (property tax, insurance, maintenance, management, HOA).
- Debt-service coverage ratio (DSCR): NOI divided by annual mortgage payment. Lenders typically require at least 1.20.
- Pre-tax cash flow: NOI minus annual debt service. Negative values are displayed in the table.
- Remaining loan balance: computed from the standard remaining-balance formula after each year of payments.
At the exit year the simulator projects sale price via compound appreciation, subtracts selling costs and the remaining loan balance, and adds net sale proceeds to the final year's operating cash flow to produce the terminal IRR cash flow.
How IRR and equity multiple are calculated
Levered internal rate of return (IRR) solves for the discount rate that makes the net present value of the cash-flow series equal to zero. The series is: Year 0 = negative total cash invested (down payment + closing costs + initial repairs); Years 1 through N-1 = annual pre-tax cash flow; Year N = annual pre-tax cash flow plus net sale proceeds. The simulator uses bisection convergence. When the series has no sign change or the solver does not converge within 500 iterations, IRR is reported as not available rather than fabricated.
Equity multiple = total cash returned / total cash invested. Total cash returned = cumulative operating cash flows + net sale proceeds. An equity multiple of 1.5x means every dollar invested returned $1.50 over the hold period.
What counts as total cash invested
Total cash invested is the amount the investor commits at acquisition: down payment + closing costs + initial repairs or renovation. It does not include ongoing operating expenses, which are already deducted in the annual cash flow. This is the denominator in the cash-on-cash return and equity multiple calculations.
Is cap rate the same as return on investment?
No. Cap rate (NOI / property value) is an unlevered yield metric with no regard to financing. Return on investment, and specifically cash-on-cash return, measures actual pre-tax cash flow against the cash the investor put in. A leveraged purchase can produce a cash-on-cash return well above the cap rate when debt service costs less than NOI, and below the cap rate when financing is expensive relative to income. This simulator outputs both the NOI (from which cap rate is derivable) and the levered cash flow (from which cash-on-cash return is derivable).
Does principal paydown count as cash flow?
Not in the operating cash flow line. Principal paydown reduces the loan balance and builds equity, but it is not cash that arrives in the investor's account during the hold period. This simulator treats principal paydown as wealth creation realised at sale: net sale proceeds = sale price minus selling costs minus remaining loan balance. IRR and equity multiple therefore include principal paydown in the terminal cash flow, not in the annual operating figure. The year-by-year table shows the remaining loan balance each year so you can track equity build-up.
Should depreciation be included in NOI?
No. Net operating income is a pre-tax, before-financing cash metric. Depreciation is a non-cash accounting deduction with no place in NOI. It matters enormously for income tax (see IRS Publication 527 for how to compute the annual residential rental property deduction), but mixing it into NOI would distort the metric that lenders and appraisers use to evaluate a property.
Does the simulator calculate taxes?
No. All results are pre-tax economic cash flows. Federal and state income taxes on rental income, the depreciation deduction, passive-activity loss limitations, and capital gains tax on disposition are not modelled. Tax treatment varies by the investor's bracket, property type, entity structure, and jurisdiction. Consult a qualified tax professional and IRS Publication 527 for the tax side of any rental investment.
Can IRR be negative?
Yes. IRR is negative whenever the total cash returned is less than the initial cash invested. This happens when the property loses value faster than income accumulates, or when high leverage and low income produce large negative operating cash flows that the exit cannot recover. The simulator detects convergence failures and reports the result as not available rather than producing a fabricated number.
Why not use live home-price forecasts?
No data provider publishes reliable long-term property-level price forecasts. Market-wide indexes (Case-Shiller, FHFA) describe national or metro-level past price changes; they say nothing reliable about a specific property over a 5- or 10-year future hold. Letting you set an appreciation assumption makes the scenario explicit and testable: run the simulation at 0%, 2%, and 4% to see how sensitive returns are to that one variable. Live feeds would add false precision without improving accuracy.