How to use the renovation payback calculator for rentals
- Enter the renovation cost and the monthly rent before and after the work.
- Enter the months the unit earns no rent during the work, because that lost rent is part of the cost.
- Open the advanced options to add monthly costs the upgrade causes, a vacancy share for the added rent and a cap rate to turn the added income into a value.
- Read the payback in months, the return on the total cost, the value added and the value at nearby cap rates.
Formula
total cost = renovation cost + monthly rent before x months with no rent
added income per month = (rent after - rent before) x (1 - vacancy) - added monthly costs
payback months = total cost / added income per month
value added = added income per year / cap rate
Return on cost is the added income per year divided by the total cost. The cap rate that breaks even is that same figure, because at that cap rate the value added equals the cost.
A kitchen and bath refresh
A $18,000 job raises rent from $1,200 to $1,550 and takes 2 months with no rent, so the total cost is $18,000 + 2 x $1,200 = $20,400. With 5% vacancy on the added rent and $25 a month of extra costs, the added income is $350 x 0.95 - $25 = $307.50 a month, or $3,690 a year.
Payback is $20,400 / $307.50 = 66.3 months and the return on cost is $3,690 / $20,400 = 18.09%. At a 6.5% cap rate the added income is worth $3,690 / 0.065 = $56,769.23, which is $36,369.23 more than the total cost.
What the numbers can and cannot tell you
Payback and return on cost compare options on the same footing: a project that pays back in three years is better than one that takes six, other things equal. The value from a cap rate assumes a buyer would price the property on its income at that rate. A small change in the cap rate changes the value a lot, which is why the table shows rates around yours.
The page ignores financing, taxes, how long the extra rent lasts and what else the money could earn. It does not know about rent limits or the rules that apply to your property. For the gross and net yield of the property itself, see the Rental Yield Calculator; for cap rates, the Cap Rate Calculator; and to track costs against a budget, the Renovation Budget Planner.
Costs that are easy to forget
Besides the work itself, add permits, design fees, holding costs such as insurance and loan interest while the unit is empty, and the cost of finding a new tenant. Enter them in the renovation cost so they count in the payback.
Assumptions and limits
- Rent is monthly and flat; the page does not model later rent increases.
- Vacancy applies only to the added rent, not to the rent that was there before.
- Months with no rent lose the old rent, and the new rent starts after the work.
- The cap rate is an example figure you can change; leave it at 0 to hide the value rows.
- Payback is Not reached when the added income is zero or negative.
Frequently asked questions
Why is the lost rent part of the cost?
It is real money you do not collect because of the work. Leaving it out would make the project look better than it is.
What is a good payback period?
There is no single answer. It depends on your alternatives, your financing and how long the improvement lasts. The page gives the number for you to compare with them.
Why does the cap rate change the value so much?
Value is income divided by the cap rate, so a lower rate multiplies the income by a larger number. The table shows rates around yours.
Why does a rise that is too small show a negative result?
If the extra rent after vacancy is less than the new monthly costs, the upgrade loses money each month, so there is no payback.