Rental Value

Rental value is the rent a property could command in the open market under normal terms. It is the income assumption that everything else in a cash on cash calculation depends on, so an optimistic rent estimate inflates the return more than almost any other input.

On the default deal, rent of $5,200 a month supports a 6.3% return. At $5,000 the return falls to about 5.1%, because each $100 of monthly rent is worth about 0.6 points of cash on cash after vacancy and percentage-based expenses.

Base rental value on leased comparable units, not asking rents or the seller's pro forma. Size, bedroom count, condition and parking all move it. If current tenants pay below market, the return improves at renewal, but the first year's return should use the rent actually in place.

Further reading: Rental Value on Wikipedia.