This portion of your return on investment is the difference between the revenue and expenses produced by the property. This is typically expressed as a percentage by dividing by the cost of the property by the difference in revenue and expenses and referred to as the 'return' or 'cap rate'. For example, a property that cost $200,000 and has a net income of $16,000/yr has an 8% cap rate.

     To calculate the revenue you total the annual rental income and, depending on the property, any income from parking or laundry. Often an allowance for vacancy or bad debt is deducted from the rental income and is typically less than 3 percent. When considering revenue it is important to know if the rents are appropriate, if they are low there could be some hidden revenue there that would make the property more appealing.

     To calculate the expenses,  you total the costs associated with operating the property and maintaining the tenants. These expenses include property tax, utilites, insurance, maintenance (allow $600/unit/yr), property management, garbage removal etc. Often a property listed for sale will not have a comprehensive list of expenses in order to make the return appear higher so it is important to check the list of expenses carefully. The expenses do not include interest on a mortgage or any capital improvements. Your accountant can clarify the difference between an expense and capital improvement. An expense would be repairing the oil furnace, a capital improvement would be replacing it with a new natural gas furnace.

     What does it carry for is an often asked question. It is the amount of rental income needed to cover all expenses including the mortgage payment. When the rental incme covers all expenses including the mortgage it 'carries' or 'pays for itself' and the owner is able to realize the property's capital gains.

     For example, a sixplex selling for $400,000 is rented at $650/apt/mo. It has a revenue of $46,800 and expenses of $18,000(est.) for a net income of $28,800 and a 7.2% cap rate. If you put 25% ($100,000) down it would leave a $300,000 mortgage. Assuming an interest rate of 6% your mortgage cost is $23,040/yr. This property 'carries' with a positive cash flow of $5,760/yr.