Rental Property Calculator

What this calculator does

It builds the income statement an investor and an underwriter both want to see — net operating income, cash flow, cap rate, cash-on-cash return and debt coverage — and then does the thing almost nothing else does: it runs your personal qualification under three genuinely different lender methods, side by side.

That matters because the same rental file passes at one lender and fails at another purely because of how the rent is treated. On the default figures here, the add-back method declines it at 54.6% and the offset method approves it at 39.0%. Identical numbers, opposite answers.

Every ratio is run on the stress-tested payment, because that is the one a lender uses. A projection built on the payment you would actually make will tell you a file passes that gets declined.

• NOI, cash flow, cap rate, cash-on-cash and debt coverage
• Three lender methods side by side, on the same file
• All of it qualified at the stress-tested rate, not the contract rate
• Your existing obligations included, because you almost certainly have some
• Break-even rent and break-even occupancy, as a stress test on the deal

Lenders qualify you at a rate you will never pay

The mortgage on these figures costs $2,865.87 a month. Every lender in the country will assess you on $3,523.25 — the payment at 7.29%, being your rate plus two points, or the 5.25% floor if that is higher.

That is $657 a month of headroom a lender insists on, and it moves the debt service ratio by five to eight points. A well-known version of this calculator qualifies you at the contract payment instead, which pushes a file into "pass" that a lender would decline.

On the defaults here that error is worth the whole answer. At the contract payment and with no other debts counted, the add-back method reports 26.8% and a comfortable pass. Stress-tested, and with an existing home in the picture, it is 54.6% and a decline.

• Payment you would make: $2,865.87. Payment you are assessed on: $3,523.25
• The qualifying rate is your rate plus two points, or 5.25%, whichever is higher
• That gap moves the debt service ratio by five to eight points
• The contract-rate version reports 26.8% and a pass
• Done properly it is 54.6% and a decline

A ratio that counts one debt is not a ratio

Almost nobody buying a rental property owns nothing else. They have a home with a mortgage on it, or they pay rent; they have a car, a line of credit, a card. All of it goes into the total debt service ratio before the new property is even considered.

The export this page replaces never asked. It computed the ratio as though the rental were the applicant's only obligation in the world, which makes every file look comfortable and makes the calculator useless at the one moment it matters.

On these figures an existing $2,800 a month takes the add-back ratio from 32.1% to 54.6% — from approved to declined. That single omission was the difference between the two answers.

• Your own home, car and cards all count before the rental does
• Leaving them out makes every file look comfortable
• $2,800 a month moves the add-back ratio from 32.1% to 54.6%
• That is the difference between an approval and a decline
• Enter what you actually pay, not what you wish you paid

The three methods, and why the spread is the point

Adding back half the rent is the strictest and the most common at the banks: half your gross rent joins your income, and the whole property payment counts against you as a debt. On these figures that is 54.6% against a 44% limit — declined.

Offsetting 80% of the rent nets the rent directly against the property's own payment, so only a shortfall reaches your ratios. Here the shortfall is small, the ratio is 39.0%, and the file is approved. Same borrower, same property, same day.

The third route ignores your personal ratios for this property altogether and asks whether the property carries itself, measured by debt coverage. It wants at least 1.10 times, and 1.25 for comfort. These figures produce 0.75, so that route is closed regardless of how good your income is.

Knowing which of the three a lender uses, before you apply, is most of what a broker adds on an investment file. It is also not something you can find on a rate sheet.

• Add back half the rent: 54.6% here — declined
• Offset 80% of the rent: 39.0% — approved
• Qualify the property itself: needs 1.10x coverage, gets 0.75x — closed
• One of three approves this file; two decline it
• Which lender you approach first decides the outcome

Net operating income is not cash flow

NOI is what the property earns before any financing decision: rent, less vacancy, less every operating expense — but never the mortgage. On these figures that is $25,872, and the cap rate of 3.98% comes straight from it.

Cash flow is what is left after the mortgage, and here it is negative $710 a month. The two get confused constantly, and the confusion always runs the same way: a property with a respectable NOI described as though the money reaches you.

The distinction matters because NOI is how an appraiser and an alternative lender value the asset, independent of how you financed it. Cash flow is what you live with.

• NOI excludes the mortgage entirely, by definition
• Here: $25,872 of NOI and negative $710 a month of cash flow
• Cap rate is NOI over price — the property's return, unlevered
• An appraiser and an alternative lender both work from NOI
• You live with the cash flow

A return that is mostly a guess is not a return

The total return on these figures is 12.93%, and it looks excellent. It is almost entirely an assumption about house prices.

Cash flow contributes negative $8,518. Principal paydown contributes $7,355, which is real and yours but not spendable until you sell or refinance. Appreciation at 3% contributes $19,500 — more than twice the cash flow, on a number nobody can know.

Strip the appreciation out and the return on the cash you actually invested is negative 0.82%. Both figures are shown here, and the appreciation is an input rather than a constant hidden inside the arithmetic, because a number that large deciding your headline should be one you chose.

• Total return 12.93%, of which $19,500 is assumed appreciation
• Cash flow contributes negative $8,518
• Principal paydown contributes $7,355 — real, but not spendable
• Without appreciation the return is negative 0.82%
• Both are shown, and the assumption is yours to set

Break-even is where the deal gets tested

This property needs $4,055 a month to break even and collects $3,200. That is 27% more rent than it earns, and no amount of good tenanting closes it.

Break-even occupancy tells the same story more starkly: 118% of the year. A year does not contain 118%. The rent, the price, the rate or the expenses have to change — the tenancy cannot.

That is not a reason to walk away on its own; plenty of Canadian rentals bought in the last few years look like this and were bought on the appreciation assumption above. It is a reason to be honest that the appreciation assumption is doing the work, and to be sure you can fund the shortfall for as long as it takes.

• Break-even rent $4,055 against $3,200 collected — 27% short
• Break-even occupancy 118%, which a year does not contain
• No amount of good tenanting fixes a rent shortfall
• The appreciation assumption is what makes a deal like this work
• Be sure you can fund the monthly shortfall meanwhile

Using your results well

Run the three methods before you get attached to a property. If the add-back method fails and the offset method passes, that tells you exactly which kind of lender to approach first — and saves a credit inquiry finding out the hard way.

Then stress the deal rather than the file: raise the vacancy allowance, raise the rate a point, and see whether it still works. A property that only functions at 96% occupancy and today's rate has very little room in it.

And keep the management and repair assumptions honest even if you plan to self-manage. A lender will often assume the cost exists whether you pay it or not, and your own time is not free just because nobody invoices you for it.

• Check all three methods before choosing a lender
• Stress the vacancy and the rate, not just the price
• Keep management and repairs honest even when self-managing
• Treat negative cash flow as a question about your reserves
• Income tax, capital cost allowance and its recapture are for an accountant