How to use the rental hold period return calculator
- Enter the purchase price, the down payment percent, the loan rate and term and the closing costs you pay in cash.
- Enter the first year rent before vacancy, a vacancy percent and the first year operating costs such as taxes, insurance and repairs. Do not include loan payments there.
- Set how many years you hold the property. Open the advanced options to change rent growth, cost growth, value growth and selling costs.
- Read the levered IRR and equity multiple, then use the cash flow table to see what you receive each year and at the sale.
Formula
Cash invested = down payment + closing costs
Net operating income = rent x (1 - vacancy) - operating costs
Cash flow in year y = net operating income - 12 x loan payment
Sale cash = price grown for the hold, less selling costs, less the loan balance
IRR: the rate that makes the cash flows add to zero
Equity multiple = total cash received / total cash put in
Rent and costs grow each year at the rates you set. The loan payment is the standard level payment, and the balance at sale is what remains after 12 x years payments.
A $300,000 rental held for 5 years
Put 25% down ($75,000) plus $6,000 of closing costs, so $81,000 goes in. The loan is $225,000 at 6.5% for 30 years, a payment of $17,065.84 a year. Year 1 rent is $30,000 with 5% vacancy and $9,000 of costs, which grow 3% a year. The net cash flow after loan payments is $2,434.16 in year 1 and grows to $4,881.58 in year 5.
After 5 years the loan balance is $210,624.70. The property value grows 3% a year to $347,782, and after 6% selling costs and the loan, the sale brings $116,290.59. The cash flows are -$81,000, then $2,434.16, $3,019.16, $3,621.71, $4,242.34 and $121,172.17 in year 5 (the $4,881.58 of operating cash plus the $116,290.59 sale). The levered IRR is 11.29% and the equity multiple is 1.66x, with a total profit of $53,489.55.
What levered means
A levered return is the return on your own cash after using a loan. Borrowing adds risk and can raise the return when the property earns more than the loan costs, or lower it when it does not. The unlevered return, which ignores the loan, is closer to the Cap Rate Calculator idea of income divided by price.
The IRR treats each yearly cash flow as arriving at the end of the year and rewards cash that comes early. The equity multiple ignores timing: it simply divides everything you got back by everything you put in, so a slow 1.66x and a fast 1.66x look the same. Looking at both gives a fuller picture.
What the model leaves out
Income taxes, depreciation, capital improvements, refinancing, loan fees and changing rates are not included. Vacancy and cost growth are single numbers you pick, so small changes there can move the answer a lot. Try a range of values, not one.
For the first year picture of the same property, see the Rental Property Calculator and the Cash on Cash Return Calculator. To check the IRR for cash flows on uneven dates, use the XIRR Calculator.
Assumptions and limits
- Cash flows happen at the end of each year, and the sale happens at the end of the last year held.
- The loan has a fixed rate with level monthly payments and is paid off or sold at the end of the hold.
- Every percentage in the form is an example you can change. Nothing in the tool is a forecast.
- Taxes, depreciation, improvement spending, management changes and refinancing are ignored.
Frequently asked questions
What is a levered IRR?
It is the yearly rate of return on the cash you invest, after the loan payments and after repaying the loan at the sale. It is called levered because the loan changes both the amount you put in and the risk you carry.
What does an equity multiple of 1.66x mean?
You get back $1.66 for every $1.00 you put in, counting all yearly cash flow and the sale. It does not say how long that took, so compare it with the IRR for the full story.
Why can the IRR be higher than the cash on cash return?
Cash on cash return looks only at one year of income on the cash invested. The IRR also counts the money you keep when the property sells, from paying down the loan and from growth in value, which often adds a lot.
Why does the hold have to be no longer than the loan term?
The sale cash depends on the loan balance at the end of the hold. If the hold were longer than the term, the loan would already be paid off and the balance formula would no longer apply in the same way.