The income a property generates — how it's earned, what reduces it, and what's left after expenses.
Monthly Cash Flow
The amount of money left in your pocket each month after collecting rent and paying every expense including the mortgage. The most immediate indicator of whether a property is profitable right now.
Formula
NOI − Mortgage Payment
Both values are monthly. Multiply by 12 for annual cash flow.
Why It Matters
Negative cash flow means the property costs you money every month. Positive cash flow means it pays you.
+$200/unit or more — strong$0–$200/unit — marginalNegative — cash flowing out
Net Operating Income (NOI)
Total income the property generates after operating expenses, but before the mortgage payment. NOI measures how profitable the property is as a business, independent of how it was financed.
Formula
EGI − Operating Expenses
Operating expenses include taxes, insurance, repairs, utilities, CapEx, management fee, and other costs. Mortgage excluded.
Why It Matters
Lenders and appraisers use NOI to value income property. Higher NOI = higher property value, regardless of financing.
Effective Gross Income (EGI)
The actual income you expect to collect after accounting for vacancy. It represents realistic revenue — not the theoretical maximum if every unit were occupied every day of the year.
Formula
Gross Rent − Vacancy Loss + Other Income
Other income includes laundry, parking, fees, etc.
Why It Matters
Underwriting on gross rent alone is a common mistake. EGI forces realistic projections by baking in expected vacancy.
Vacancy Loss
The estimated revenue lost due to units being unoccupied. Even well-managed properties experience vacancy between tenants, during renovations, or in soft rental markets.
Formula
Gross Rent × Vacancy Rate ÷ 100
E.g. $10,000 gross rent at 5% vacancy = $500 vacancy loss.
Typical Range
5–10% is standard for most markets. Stable markets may warrant 3–5%.
CapEx Reserve
A monthly amount set aside for capital expenditures — major repairs and replacements like roofs, HVAC systems, appliances, and plumbing. CapEx is money you save now so you're not caught short when a major system fails.
Rule of Thumb
A common starting point is 1% of purchase price per year — but older properties, high-cost-of-living markets, or properties with aging systems may require 2–3%.
$300K newer property ≈ $250/mo · Older property may need $500–$750/mo
Why It Matters
Skipping CapEx creates inflated cash flow projections. A $12,000 roof will arrive whether you budgeted for it or not.
Property Management Fee
The monthly cost of a property management company. Entered as a percentage of effective gross income so it scales naturally with actual revenue collected.
Formula
EGI × Management Rate ÷ 100
Applied to EGI — not gross rent — so it reflects what is actually collected after vacancy.
Typical Range
8–12% of collected rent. Even if you self-manage, include it — your time has value.
Mortgage Payment (P+I)
The monthly principal and interest payment. KapExx calculates this automatically from your loan amount, annual interest rate, and loan term using the standard fixed-rate amortization formula.
Formula
L × [r(1+r)ⁿ] ÷ [(1+r)ⁿ − 1]
L = loan amount · r = annual rate ÷ 100 ÷ 12 · n = term × 12
Note
The mortgage payment is a financing cost, not an operating expense. It is excluded from NOI and OER calculations by design.
Disclaimer
All metrics and benchmarks are for informational and educational purposes only. Not financial, investment, tax, or legal advice. Consult a qualified advisor before making investment decisions.
Investment Metrics
Returns & Valuation
How to measure performance, compare deals, and understand what a property is actually worth relative to what it earns.
Cash-on-Cash Return (CoC)
Measures how much annual cash flow you earn relative to the cash you actually invested — your down payment plus closing costs. Think of it like the yield on a bond, but for real estate.
Formula
Annual CF ÷ (Down Payment + Closing Costs) × 100
KapExx uses total cash invested — down payment plus closing costs — not down payment alone.
Why It Matters
Tells you how hard your cash is working. Useful for comparing multiple deals side by side.
8%+ — strong5–8% — acceptableBelow 5% — weak
Cap Rate
Capitalization rate measures a property's income potential relative to its price, assuming an all-cash purchase. It's the universal language of commercial real estate — used by investors and lenders to compare properties instantly.
Formula
(Monthly NOI × 12) ÷ Purchase Price × 100
KapExx calculates NOI monthly and annualizes it by multiplying by 12 before dividing by price.
Why It Matters
Higher cap rate = more income per dollar of price. Always compare within the same market and asset type.
6%+ — generally strong4–6% — market-dependentBelow 4% — low yield
Internal Rate of Return (IRR)
The annualized total return on your investment over the full hold period — factoring in every annual cash flow plus the net proceeds from selling. The most comprehensive single number for evaluating a real estate investment.
How KapExx Calculates It
Solved via Newton-Raphson iteration on an annual cash flow series: Year 0 = negative total invested; Years 1–N = annual operating cash flows; final year adds net sale proceeds after loan payoff and selling costs.
Why It Matters
Unlike CoC, IRR accounts for the time value of money and the full exit. It is the primary decision metric used by institutional investors.
The value created by this investment above and beyond your required return rate. A positive NPV means the deal exceeds your hurdle rate. A negative NPV means it doesn't — even if it's technically profitable.
Formula
Σ CF_t ÷ (1 + r)^t
Sum of each year's cash flow discounted by your required return rate (r) over time (t). Includes initial investment as negative Year 0.
How To Read It
Positive = deal beats your hurdle rate. Negative = it falls short. Set your discount rate to your minimum acceptable return.
Equity Multiple
How many times you get your invested capital back over the full hold period. A 2.0x equity multiple means for every $1 you put in, you got $2 back in total — cash flows plus the net sale proceeds.
Formula
Total Cash Received ÷ Total Cash Invested
Total cash received = sum of all annual cash flows + net sale proceeds after loan payoff and selling costs.
Why It Matters
IRR is time-sensitive — a high IRR on a short hold can have a low equity multiple. Both together give a complete return picture.
How many years it takes to recover your full initial investment through cash flow alone — not counting appreciation or the sale. A purely cash-flow-based measure of payback speed.
Formula
Total Cash Invested ÷ Annual Cash Flow
Uses Year 1 annual cash flow. Not calculable when cash flow is negative.
Why It Matters
Useful for conservative investors who want to know when cash flow alone makes them whole, regardless of appreciation.
Gross Rent Multiplier (GRM)
A quick valuation shortcut — how many years of gross rent it would take to equal the purchase price. Useful for rapid screening, best used to compare similar properties in the same market.
Formula
Purchase Price ÷ (Monthly Gross Rent × 12)
KapExx uses monthly gross rent and annualizes it by multiplying by 12.
Limitation
GRM ignores expenses entirely. Use for quick screening only — never as a substitute for full NOI-based analysis.
Monthly gross rent divided by total square footage. A useful benchmark for comparing rental rates across properties of different sizes and understanding whether a property's rents have room to grow.
Formula
Monthly Gross Rent ÷ Total Square Footage
Result is expressed as $/sqft per month.
How To Use It
Compare to similar properties in the same submarket to gauge whether rents are at, above, or below market.
Exit Value & Income Capitalization
The exit value is the estimated sale price of your property at the end of the hold period. KapExx calculates it using income capitalization — the standard method professional investors and appraisers use to value income-producing properties. Rather than guessing a future price, it derives value directly from what the property earns.
Formula
Exit Value = Year 10 NOI ÷ Exit Cap Rate
Example: if Year 10 NOI is $301,025 and your exit cap rate is 6%, the exit value is $301,025 ÷ 0.06 = $5,017,077.
What It Represents
The price a buyer would pay for the property based on the income it generates. A buyer purchasing at a 6% cap rate is saying: "I will pay whatever price gives me a 6% return on this property's NOI." The seller's NOI directly drives the sale price — which is why rent growth over the hold period has such a powerful effect on exit value and IRR.
Why Years 1–9 Look Different
Intermediate years (1–9) show appreciation-based estimates — simple compounding of the purchase price at your defined appreciation rate. These are rough market value estimates. Year 10 switches to income capitalization because that is the actual exit event. Income capitalization typically produces a higher value than simple appreciation on a well-performing property, especially after 10 years of rent growth — this is intentional and reflects how buyers actually price commercial and multifamily assets.
Exit Cap Rate Sensitivity
The exit cap rate is one of the most important assumptions in the entire model. A lower exit cap rate means a higher sale price — and significantly higher IRR and NPV. Be conservative: markets change, and buyers in 10 years may demand a higher cap rate than today. Using a cap rate 0.5–1.0% higher than the going-in cap rate is a common stress-test approach.
Selling Costs
KapExx deducts your defined selling costs (default 6%) from the exit value before calculating IRR and NPV. The projection table shows the gross exit value; IRR and NPV reflect the net proceeds after selling costs and loan payoff.
5–6% exit cap — aggressive / strong market6–7% exit cap — moderate / conservative7%+ exit cap — distressed / high-risk market
Disclaimer
All metrics and benchmarks are for informational and educational purposes only. Not financial, investment, tax, or legal advice. Consult a qualified advisor before making investment decisions.
Investment Metrics
Risk & Coverage
Metrics that measure how safe a deal is — how much cushion exists before a property stops covering its costs.
Debt Service Coverage Ratio (DSCR)
How many times over the property's income covers its mortgage payment. The most important metric for lenders — most require a minimum DSCR before approving an investment property loan.
Formula
Monthly NOI ÷ Monthly Mortgage Payment
A DSCR of 1.0 means income exactly covers the mortgage — no cushion.
Lender Threshold
Most lenders require 1.25x or higher. Below 1.0x means the property does not cover its own debt service.
The minimum occupancy rate the property needs to cover all costs — operating expenses plus the mortgage. Below this level the property loses money. Your safety margin is how far your projected occupancy sits above this number.
All values are monthly. Result is the minimum occupancy % needed to break even.
Why It Matters
A property with 70% BEO and 90% projected occupancy has a 20-point cushion before it loses money. Lower BEO = safer property.
Below 80% — comfortable cushion80–90% — limited marginAbove 90% — very little room
Break-Even Timeline
How many years it takes for cumulative cash flow to recover your total cash invested — down payment plus closing costs. Not to be confused with Break-Even Occupancy, which is an income coverage measure.
Formula
(Down Payment + Closing Costs) ÷ Annual Cash Flow
Uses Year 1 annual cash flow. Only calculable when cash flow is positive.
Why It Matters
Lower is better. A 7-year break-even means you're in profit territory from year 8 onward through cash flow alone.
Disclaimer
All metrics and benchmarks are for informational and educational purposes only. Not financial, investment, tax, or legal advice. Consult a qualified advisor before making investment decisions.
Real Estate Tax
Real Estate Tax
Key tax concepts every real estate investor should understand — the rules that can dramatically affect your after-tax returns.
Depreciation
The IRS allows you to deduct the cost of a residential rental property over 27.5 years, even if the property is actually appreciating in value. This is a paper loss — you don't have to spend money to claim it — and it directly reduces your taxable income from the property.
How It Works
Building Value ÷ 27.5 = Annual Deduction
Land is not depreciable. Only the building value qualifies. A $300K property with $60K land = $240K depreciable basis = $8,727/yr deduction. Note: the IRS mid-month convention applies in year 1, so your first-year deduction will be less than a full year's amount depending on the month of acquisition.
Depreciation Recapture
When you sell, the IRS recaptures all depreciation taken at a 25% tax rate. Factoring recapture into your exit analysis is critical — it can meaningfully reduce your net sale proceeds.
A provision in the tax code that allows you to sell an investment property and defer capital gains taxes by reinvesting the proceeds into a like-kind property. Named after Section 1031 of the IRS code, it's one of the most powerful wealth-building tools in real estate. Under current law, taxes can be deferred indefinitely through successive exchanges, and heirs may receive a stepped-up basis at death — though tax laws are subject to change.
Key Rules
You have 45 days to identify a replacement property after the sale closes, and 180 days to close on it. The replacement property must be of equal or greater value to defer all taxes.
Why It Matters
Instead of paying 15–20% capital gains tax on your profit, you keep 100% of the proceeds working for you in the next deal. Compounded over multiple exchanges, the wealth impact is enormous.
45 days — identify replacement180 days — close on replacementPrimary residences do not qualify
Capital Gains Tax
The tax owed on profit from selling an investment property. The rate depends entirely on how long you held the property. Short-term gains are taxed as ordinary income — which can be punishing. Long-term gains receive preferential rates.
Short-Term (Held < 1 Year)
Taxed as ordinary income — same rate as your salary. Can be as high as 37% depending on your bracket. Almost never makes sense to sell before 12 months.
Long-Term (Held > 1 Year)
Taxed at preferential rates: 0%, 15%, or 20% depending on your taxable income. Higher-income investors may also owe an additional 3.8% Net Investment Income Tax (NIIT) on top of the capital gains rate.
Note: Depreciation recapture is taxed separately at 25%.
Short-term — up to 37%Long-term — 0%, 15%, or 20%NIIT — +3.8% for high-income investorsRecapture — 25%
Passive Activity Rules
The IRS classifies most rental activity as passive. This matters because passive losses — including depreciation — can generally only offset passive income, not your W-2 wages or business income. There are two important exceptions that every investor should know.
$25,000 Exception
If you actively participate in managing your rental and your modified AGI is under $100,000, you can deduct up to $25,000 of passive losses against ordinary income. This phases out between $100K–$150K AGI.
Real Estate Professional
If you spend more than 750 hours per year in real estate activities and it represents more than half your working time, rental losses are no longer passive — they can offset any income without limit. Each rental property must also be materially participated in separately, unless a grouping election is filed with the IRS to treat all properties as one activity.
Active participation — up to $25K deductionRE Professional — unlimited deductions
Cost Segregation
A tax strategy that involves hiring an engineer to break a property down into its individual components — appliances, flooring, fixtures, land improvements — and reclassify them for faster depreciation. Instead of depreciating everything over 27.5 years, qualifying components are depreciated over 5, 7, or 15 years.
The Benefit
Front-loading depreciation deductions into the early years of ownership creates larger paper losses now, reducing taxable income when it matters most. Particularly powerful when combined with bonus depreciation — though bonus depreciation has been phasing down since 2023 (80% in 2023, 60% in 2024, 40% in 2025) and is no longer 100% expensing. Consult a tax advisor for current rates.
Who It Makes Sense For
Cost segregation studies typically cost $5,000–$15,000. Generally worth it on properties over $500K in value, or for investors in high tax brackets who can fully utilize the accelerated losses.
Personal property — 5 or 7 yearsLand improvements — 15 yearsBuilding structure — 27.5 years
QBI Deduction (Section 199A)
The Qualified Business Income deduction allows eligible taxpayers to deduct up to 20% of qualified rental income from their taxable income. Introduced by the Tax Cuts and Jobs Act of 2017, it was designed to give pass-through business owners tax parity with corporations. Whether your rental activity qualifies depends on how it's structured and your income level.
Who Qualifies
To qualify, rental activity must rise to the level of a trade or business under IRC §162 — simply receiving rental income is not enough. The IRS safe harbor (Rev. Proc. 2019-38) provides a clear path: 250+ hours of rental services per year with documented records qualifies. Below that threshold, taxpayers must independently establish trade or business status, which is a higher and less certain bar. Single-family long-term rentals are the hardest to qualify.
Income Limits
The full 20% deduction is available below a taxable income threshold that adjusts annually for inflation. Above that threshold, limitations and phase-outs apply. These figures change each tax year — consult current IRS guidance or a tax professional for the applicable limits.
Consult a tax professional — QBI rules are complex and fact-specific.
Up to 20% deduction on qualifying income250+ hours/year — safe harbor threshold
Tax Disclaimer
The tax information on this page is for general educational purposes only and does not constitute tax, legal, or financial advice. Tax laws change frequently and their application varies based on individual circumstances. Always consult a qualified CPA or tax attorney before making investment decisions based on tax considerations.