The core formulas
Cap rate
Where NOI (Net Operating Income) = effective gross rental income minus operating expenses, BEFORE mortgage P&I and income tax. Effective gross = gross rent × (1 − vacancy %). Operating expenses include property tax, insurance, maintenance, management, HOA, owner-paid utilities, and CapEx reserves.
What we deliberately include in opex: a CapEx reserve (default 5% of rent). Many calculators omit this to inflate cap rate; we include it because the roof, HVAC, water heater, and flooring DO wear out, and an honest NOI accounts for the smoothed replacement cost.
Cash-on-cash return
Cash flow = NOI − annual mortgage P&I. Total cash invested = down payment + closing costs + initial repairs (the actual dollars out of your pocket at close, not the loan amount).
DSCR (Debt Service Coverage Ratio)
Annual debt service is the principal + interest mortgage payment × 12. We do NOT include taxes + insurance in debt service (those are already in opex via NOI). For cash purchases the DSCR readout shows “Cash” instead of dividing by zero.
Mortgage payment
Standard fully-amortizing fixed-rate formula:
Where L = loan amount, r = monthly interest rate (annual rate ÷ 12), n = total payments (loan term × 12). Same formula your lender uses. If you want a standalone version, see the mortgage payment calculator.
Where the auto-fill data comes from
Rent — HUD Fair Market Rent
HUD (the U.S. Department of Housing and Urban Development) publishes county-level rent estimates annually for setting Section 8 voucher payment standards. We query the HUD API with your property's county + bedroom count and use the returned FMR as the rent default. Actual market rent in most areas runs slightly above FMR — treat it as a floor, then check Zillow / Rentometer for comps before locking in.
Why HUD instead of Zillow Rent Zestimate? HUD is methodologically transparent, public, and free. Zillow doesn't publish their per-property algorithm and rate- limits aggressive querying. We trade off some precision for transparency and rate-limit headroom.
Mortgage rate — FRED 30-year fixed
The Federal Reserve Bank of St. Louis (FRED) publishes the weekly 30-year fixed mortgage rate series (MORTGAGE30US, sourced from Freddie Mac's Primary Mortgage Market Survey). We pull the latest week's reading and use it as the interest-rate default. Investment-property rates run typically 0.5-1.0 percentage points above this owner- occupied benchmark — adjust upward if you want to model non-owner-occupied financing more accurately.
Property tax — state effective rate
We maintain a state-by-state lookup of effective property tax rates (annual tax as a percentage of assessed value) from a curated dataset of state property tax statistics. We apply this rate to your purchase price. This is the most approximate of our three data sources — actual tax rates vary significantly within a state (Cook County IL vs rural Illinois, for example). Always confirm with the county assessor for the specific property.
10-year projection
We project rent, expenses, and mortgage payments year-by- year. Defaults:
- Rent growth: 2.5% annually (long-term U.S. average)
- Expense growth: 2.5% annually (matched to rent so opex ratio stays stable)
- Mortgage: fully amortized — principal and interest portions recomputed each year
- Appreciation: 3% annually (long-term U.S. average; varies wildly by market)
All four assumptions are editable on the Pro plan. The 10-year output shows cumulative cash flow, cumulative principal paydown, and ending equity year-by-year.
Tax strategy
Depreciation
Residential rentals depreciate over 27.5 years straight-line (IRS schedule). We default the building portion to 85% of purchase price (land = 15%, non-depreciable). Annual depreciation = (purchase price × 0.85) ÷ 27.5. This is a paper deduction — it doesn't affect cash flow but shelters cash flow from income tax.
Mortgage interest deduction
We compute the interest portion of each year's mortgage payments from the amortization schedule and add it to total deductions.
Tax savings
Tax savings = (depreciation + mortgage interest) × your marginal tax rate. Default marginal rate is 24%. Override on the Tax Strategy panel if your bracket is different.
Exit scenarios
We model the sale of the property in years 1 through 10. Each year: projected sale price = current value × (1 + appreciation rate)years. Net sale proceeds = sale price − selling costs (default 6%) − remaining loan balance. Total profit = net proceeds + cumulative cash flow received during the hold − initial cash invested. This drives the “best year to exit” recommendation.
Edge cases we handle explicitly
- Cash purchases (no loan):DSCR shows “Cash” instead of dividing by zero. Cash-on- cash uses total cash purchase amount as the denominator.
- Owner-occupant units:in house-hack scenarios, we allow the owner-occupied unit to have $0 rent (which would normally fail validation) so the calculator correctly models the “living for free” scenario.
- Multi-family rent estimation: HUD FMR is per-unit by bedroom count, not per-property. For 2-4 unit properties we sum the per-unit FMR estimates.
- Non-US addresses:Google Places autocomplete is restricted to US results. Manual entry is still allowed but the auto-fill from HUD / FRED / state tax obviously doesn't fire.
What we deliberately don't do
- We don't estimate rehab costs based on property condition— we'd need an inspection to do that well. The rehab cost estimator gives you sq-ft-based defaults for common work items, but the actual number is between you and your contractor.
- We don't model speculative future rent increasesbeyond the editable annual growth percentage. No “assume you raise rent 15% on turnover” — that's a thumb on the scale we don't take.
- We don't include landlord time as an expenseunless you set management % > 0. Most self-managed investors should still input 8-10% management to model the true cost — the day you hand it off to a PM, the deal economics shouldn't suddenly change.
Source of truth
The calc-analysis library is internal proprietary code. If you find a specific case where our output diverges from what you'd compute by hand, email hello@usetruecap.com with the inputs and we'll investigate — methodology bugs are the most important kind of bug to us.
Try it
Best way to verify the methodology is to run a deal you already understand. Enter the inputs, see what TrueCap outputs, compare to your own math.