▸ CALCULATION METHODOLOGY & ASSUMPTIONS

CasaWise.ai  ·  Professional Grade Investment Analysis

How We Calculate
Your Numbers

Every metric in CasaWise.ai is derived from industry-standard formulas used by lenders, appraisers, and professional investors. This document explains exactly how each number is calculated, what assumptions are made, and how the three-scenario engine models risk.

In This Document

  1. Core Financial Formulas
  2. Key Investment Metrics
  3. Three-Scenario Engine
  4. Year-by-Year Projections
  5. Internal Rate of Return (IRR)
  6. Exit Strategy Analysis
  7. Deal Risk Score
  8. Standing Assumptions
  9. Data Sources
Section 01
Core Financial Formulas

The foundation of every analysis — mortgage payments and amortization schedules calculated to the penny.

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Monthly Mortgage Payment

Payment = P × r × (1 + r)ⁿ / ((1 + r)ⁿ − 1) Where: P = Loan principal (purchase price × loan-to-value %) r = Monthly interest rate (annual rate ÷ 12 ÷ 100) n = Total payments (loan term in years × 12)

This is the standard amortization formula used by every mortgage lender. For a 0% interest rate, the payment is simply the principal divided by the number of months. If the principal or term is zero, the payment is $0 (all-cash purchase).

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Amortization Schedule

For each month (1 through n): Interest = Remaining Balance × Monthly Rate Principal = Monthly Payment − Interest Balance = Previous Balance − Principal (min $0)

The schedule tracks every payment split between principal and interest for the full loan term. The minimum $0 balance guard prevents floating-point rounding errors from producing a negative balance in the final months.

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Total Cash Invested

Cash Invested = Down Payment + Rehab Cost + Closing Costs + Loan Points Where: Down Payment = Purchase Price − Loan Amount Closing Costs = Purchase Price × Closing Cost % Loan Points = Loan Amount × Points %

This is your total out-of-pocket cost to acquire the property — the denominator for Cash-on-Cash Return and Flip ROI. It captures every dollar you need at closing plus renovation costs.

Section 02
Key Investment Metrics

Eight metrics that professional investors use to evaluate every deal. CasaWise.ai computes all eight simultaneously — no manual spreadsheets required.

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Net Operating Income (NOI)

NOI = Effective Gross Rent − Total Operating Expenses Effective Gross Rent = Monthly Rent × 12 × (1 − Vacancy Rate %) Total Expenses = Fixed Costs + Revenue-Based Costs + CapEx Reserve Fixed Costs = (Property Tax + Insurance + HOA × 12) × Expense Modifier Revenue Costs = Gross Rent × (Maintenance % + Management %) × Expense Modifier CapEx Reserve = Gross Rent × CapEx % × CapEx Modifier

NOI is the income your property generates before debt service. Total rent includes up to 3 ADU (Accessory Dwelling Unit) incomes. Expenses are organized into three groups:

Fixed Costs — property tax, insurance, and HOA dues. These are dollar amounts you enter, adjusted by the scenario's Expense Modifier (×1.2 in worst case, ×1.0 in base, ×0.85 in best).

Revenue-Based Costs — maintenance and management fees calculated as a percentage of your gross rent, also adjusted by the Expense Modifier.

CapEx Reserve — your capital expenditure reserve (roof, HVAC, appliances). This uses its own separate CapEx Modifier instead of the general Expense Modifier — because in a worst-case scenario, big-ticket repairs tend to cost significantly more than everyday operating expenses. The CapEx Modifier is ×1.4 in worst case (40% cost overrun), ×1.0 in base, and ×0.7 in best case (reflecting newer systems needing less capital replacement).

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Annual & Monthly Cash Flow

Annual Cash Flow = NOI − Annual Debt Service Monthly Cash Flow = Annual Cash Flow ÷ 12 Annual Debt Service = Monthly Mortgage Payment × 12

Cash flow is what you actually keep after paying your mortgage. This is the single most important number for buy-and-hold investors. Positive cash flow means the property pays for itself and puts money in your pocket.

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Cap Rate (Capitalization Rate)

Cap Rate = (NOI ÷ Purchase Price) × 100

Cap rate measures return independent of financing. It tells you what the property earns as a percentage of its value, regardless of how you financed it. Higher cap rates generally indicate higher returns but often come with higher risk. A 6–8% cap rate is considered strong in most markets.

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Cash-on-Cash Return (CoC)

Cash-on-Cash Return = (Annual Cash Flow ÷ Total Cash Invested) × 100

CoC measures actual return on your invested capital. Unlike cap rate, this accounts for leverage. A deal with 20% down and strong CoC means your money is working harder than it would in stocks or bonds. Professional investors typically target 8–12%+.

🛡️

Debt Service Coverage Ratio (DSCR)

DSCR = NOI ÷ Annual Debt Service Special case: All-cash (no debt) → DSCR = 99.9 (if NOI > 0)

DSCR tells lenders (and you) whether the property generates enough income to cover its mortgage. A DSCR of 1.0 means break-even. Most lenders require 1.25+. Below 1.0 means the property loses money before maintenance surprises — a critical warning sign.

⚖️

Gross Rent Multiplier (GRM)

GRM = Purchase Price ÷ Annual Gross Rent

GRM is a quick-screening metric — how many years of gross rent to recoup the purchase price. Lower is better. It ignores expenses entirely, so it's a rough filter, not a decision metric. A GRM under 12 generally signals a deal worth deeper analysis.

✅

The 1% Rule

1% Rule = (Monthly Rent ÷ Purchase Price) × 100

A classic rental property screening heuristic. If monthly rent is at least 1% of the purchase price, the deal is likely to cash flow positively. While not universally achievable in high-cost markets, it remains the most widely-used quick filter in real estate investing.

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Depreciation & Tax Savings

Annual Depreciation = (Purchase Price × 80% + Rehab Cost) ÷ Depreciation Years Year 1 Tax Savings = (Annual Depreciation + Year 1 Interest) × Tax Bracket % Projection Years: each year uses actual interest from amortization schedule

The IRS allows you to depreciate the building portion of your investment (typically 80% of purchase price — land is not depreciable). Rehab costs are 100% depreciable as improvements. Combined with mortgage interest deductions, this can significantly reduce your tax liability. CasaWise.ai uses your actual amortization interest each year, not a flat estimate.

Section 03
Three-Scenario Engine

Every property is analyzed simultaneously under three scenarios — worst case, base case, and best case. When market data is available from your location, the base case uses real local appreciation and rent growth rates.

Worst Case
  • Vacancy ×1.8
  • Expenses ×1.2
  • Appreciation Market − 4%
  • Rent Growth Market − 2%
  • CapEx ×1.4
Base Case
  • Vacancy ×1.0
  • Expenses ×1.0
  • Appreciation Market rate
  • Rent Growth Market rate
  • CapEx ×1.0
Best Case
  • Vacancy ×0.5
  • Expenses ×0.85
  • Appreciation Market + 2.5%
  • Rent Growth Market + 1.5%
  • CapEx ×0.7
How Market Data Flows In

When CasaWise.ai retrieves market intelligence for your property's location, it extracts the local 5-year appreciation rate and 1-year rent growth rate. These become the base case. When no market data is available, conservative defaults are used:

  • Default base appreciation: 3.0% per year
  • Default base rent growth: 2.5% per year
  • Worst case appreciation floor: −2.0% (prevents unrealistic projections)
  • Worst case rent growth floor: 0.0% (rents don't go backwards in worst case)
Section 04
Year-by-Year Projections

CasaWise.ai models your investment forward year by year, accounting for appreciation, rent growth, expense inflation, and future capital expenditures.

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Annual Projection Model

For each year (1 through projection horizon): Property Value = Previous Value × (1 + Appreciation Rate) Monthly Rent = Previous Rent × (1 + Rent Growth Rate) Year 1: Rent stays at input value (lease locked) Year 2+: Rent grows annually Expenses (inflated each year): Property Tax → inflates 2% per year Insurance → inflates 3% per year HOA → inflates 3% per year Maintenance % → tracks with current rent Management % → tracks with current rent CapEx % → tracks with current rent Equity = Property Value − Loan Balance (from amortization) Annual Return = Cumulative Cash Flow + Appreciation + Cumulative Tax Savings

Year 1 rent is locked — reflecting the reality that your first tenant signs at the listed rate. Starting in year 2, rent grows by the scenario's rent growth rate. Expenses inflate independently: property taxes at 2% (reflecting typical reassessment increases), and insurance and HOA at 3% (reflecting industry trends). Revenue-based costs like maintenance and management automatically scale with growing rent.

Future Capital Expenditures

You can schedule up to 2 future capital expenditure events (e.g., new roof in year 5, HVAC replacement in year 8). These are deducted from cash flow in the specified year, affecting your cumulative returns and IRR calculation. This provides a realistic view of long-term ownership costs.

Section 05
Internal Rate of Return (IRR)

IRR is the annualized return on your investment accounting for the time value of money — the gold standard metric for comparing investments across asset classes.

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IRR Calculation

Cash Flow Series: Year 0: −Total Cash Invested (initial outlay) Year 1–N: Annual Cash Flow + Annual Tax Savings Final Year: + Net Sale Proceeds Net Sale Proceeds = Property Value × (1 − Selling Cost %) − Remaining Loan Balance Selling Cost % defaults to 6% (standard agent + closing costs)

IRR is the discount rate that makes the Net Present Value (NPV) of all cash flows equal to zero. In plain terms: it's the annualized return that accounts for both the timing and the size of every dollar in and out.

The Full Formula — find the rate (r) where: NPV = Σ CFₜ / (1 + r)ᵗ = 0 t=0 to N Expanded: CF₀ CF₁ CF₂ CFₙ ────────── + ────────── + ────────── + ... + ────────── = 0 (1 + r)⁰ (1 + r)¹ (1 + r)² (1 + r)ⁿ Where: CF₀ = −Cash Invested (negative — money going out) CF₁ to CFₙ₋₁ = Annual Cash Flow + Tax Savings CFₙ = Annual Cash Flow + Tax Savings + Net Sale Proceeds r = the IRR we're solving for n = your projection horizon in years This equation has no closed-form solution — it must be solved iteratively. CasaWise.ai uses the Newton-Raphson method: r(next) = r(current) − NPV(r) / NPV'(r) Repeated up to 100 iterations until NPV < $1.

This is the same approach used by Excel's IRR function and HP financial calculators. The calculation assumes you sell the property at the end of your projection period, paying selling costs and retiring the remaining mortgage. Results outside the −100% to +500% range are flagged as unreliable and not displayed. If the formula fails to converge (extremely unusual inputs), CasaWise.ai reports "N/A" rather than displaying a misleading number.

Section 06
Exit Strategy Analysis

Every property is analyzed for three exit strategies simultaneously. You don't toggle between them — you compare.

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Fix & Flip

Flip Profit = ARV − Purchase Price − Rehab Cost − Selling Costs − Holding Costs − Loan Points − Closing Costs Selling Costs = ARV × Selling Cost % Holding Costs = (Monthly Mortgage + Prorated Tax + Prorated Insurance) × Hold Months Flip ROI = (Flip Profit ÷ Cash Invested) × 100 ARV = After Repair Value (or Purchase Price + Rehab if not specified)

The flip analysis computes your profit after all costs of buying, holding, renovating, and selling. Holding costs include your mortgage payments and prorated property tax and insurance during the renovation period. ARV defaults to purchase price plus rehab if you haven't specified a separate after-repair value.

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BRRRR (Buy, Rehab, Rent, Refinance, Repeat)

Refinance Loan Amount = ARV × Refinance LTV % Cash Recouped = Refinance Loan Amount − Original Loan Amount New Monthly Payment = PMT(Refinance Loan, Refinance Rate, 30 years)

The BRRRR strategy lets you recoup your cash by refinancing at the higher ARV. If the refinance loan exceeds your original loan, you pull out cash — potentially recovering your entire down payment and rehab cost. The new payment is calculated at your specified refinance rate over a standard 30-year term.

The 70% Rule (Deal Insights)

CasaWise.ai's Deal Insights screen evaluates flip deals against the industry-standard 70% Rule: your purchase price should be at or below 70% of the ARV minus rehab costs. This provides a built-in safety margin to account for unexpected costs and market shifts.

Section 07
Deal Risk Score

The CasaWise.ai Risk Score (0–100) is a composite score built from four core metrics, using thresholds aligned with industry lending and investment standards.

Metric Strong Moderate Weak
DSCR ≥ 1.50 → +15 pts ≥ 1.25 → +10 pts < 1.00 → −20 pts
Cash-on-Cash ≥ 12% → +15 pts ≥ 8% → +10 pts, ≥ 4% → +5 pts < 4% → −10 pts
Cap Rate ≥ 8% → +10 pts ≥ 6% → +5 pts < 6% → −5 pts
1% Rule ≥ 1.0% → +10 pts < 1.0% → −5 pts
The score starts at 50 (neutral) and adjusts based on each metric's strength. The result is clamped between 0 and 100. Here's how to read it:
80–100
Strong Deal
60–79
Solid
40–59
Moderate
20–39
Caution
0–19
High Risk
Section 08
Standing Assumptions

These are the built-in assumptions that CasaWise.ai uses when you haven't specified a value or when an industry-standard default applies.

Assumption Value Rationale
Land / Building Split 20% / 80% Standard IRS guidance for residential rental depreciation. Land is not depreciable; 80% of purchase price is allocated to the building.
Rehab Depreciation 100% Rehabilitation costs are classified as building improvements and are 100% depreciable over the depreciation period.
Property Tax Inflation 2% per year National average for annual property tax reassessment increases.
Insurance Inflation 3% per year Reflects the trend of rising insurance premiums nationally, particularly in disaster-prone regions.
HOA Inflation 3% per year HOA dues typically rise faster than general inflation due to deferred maintenance and reserve funding requirements.
Default Selling Costs 6% Standard assumption for agent commissions (5–6%) plus seller closing costs. Applied to IRR terminal value and flip analysis.
BRRRR Refinance Term 30 years fixed Industry-standard refinance term for long-term hold investors.
Year 1 Rent No growth First-year rent is locked at the input value, reflecting a signed lease at the listed rate. Growth begins in year 2.
All-Cash DSCR 99.9 When there is no debt service, DSCR is effectively infinite. Capped at 99.9 for display purposes.
IRR Bounds −100% to +500% Results outside this range are considered unreliable and are not displayed. Prevents misleading metrics on edge-case inputs.
What's User-Configurable vs. Fixed

The annual expense growth rates (property tax: 2%/yr, insurance and HOA: 3%/yr), the 80/20 land-building split, and the 30-year BRRRR term are fixed model assumptions. Your starting property tax rate, insurance rate, and vacancy rate are estimated city-by-city using Gemini AI based on your property's location — not flat national defaults. When no location is available, conservative fallbacks apply (approximately 1.1% property tax rate, 0.45% insurance rate, 8% vacancy). Every other variable — including management fees, CapEx, tax bracket, depreciation years, and all scenario modifiers — is driven by your inputs and the three-scenario engine.

Section 09
Data Sources

CasaWise.ai pulls live data from authoritative sources — we never use AI-generated numbers for financial rates or market data points.

Data Point Source Refresh Rate
30-Year Mortgage Rate FRED (Federal Reserve Economic Data) Weekly, cached 6 hours
15-Year Mortgage Rate FRED (Federal Reserve Economic Data) Weekly, cached 6 hours
Treasury Rates FRED (Federal Reserve Economic Data) Daily, cached 6 hours
Macroeconomic Dashboards Google Gemini AI + FRED Cached 6 hours
Local Market Intelligence Perplexity Sonar AI (paid tiers) Cached 6 hours per location
Geocoding OpenStreetMap Nominatim Real-time lookup