The Payback Ratio
The Payback Ratio is one of a variety of calculations appraisers, buyers and sellers, accountants and other market analysts associated with real estate investing use to evaluate the status of rental income property cash flows.
Payback Ratio is a good starting point because it answers the question: How long will it take to get back my investment from net cash flow? It does this by identifying the number of years required for investors to recapture their original cash investment (e.g., the down payment and closing costs) from the property's anticipated future net cash flow (net operating income less debt service).
I ÷ C = R
I = investment
C = net cash flow
R = payback ratio
Let's say you're considering to invest into a duplex that will require a $30,000 down payment, generates an annual net cash flow of $3,450, and you want to calculate how many years it will take to recapture your initial cash investment.
$30,000 ÷ $3,450 = 8.7 years
iCalculator is used to illustrate the calculation.