Calculating ROI on Rental Property
Master rental property ROI calculation with detailed analysis and education. Learn the math while evaluating real investment opportunities.
How the Calculating ROI on Rental Property works
Step through comprehensive ROI calculation: acquisition costs, income analysis, expense breakdown, and return metrics. Understand each component and how it affects overall returns.
Knowing how to calculate ROI empowers better investment decisions. This tool teaches the process while providing professional-grade analysis for your properties.
How it works
Tutorial
Mastering rental ROI calculation empowers you to quickly evaluate opportunities, negotiate effectively, and avoid overpriced properties. Understanding how small changes in variables dramatically impact returns helps you structure winning offers and improve underperforming properties.
You have two options: use the calculator above for guided learning with instant calculations, or follow this comprehensive manual guide to rental property ROI.
The Formula
| Component | Formula |
|---|---|
| Total Investment | Down Payment + Closing + Repairs + Reserves |
| Annual Cash Return | NOI – Annual Debt Service |
| Cash-on-Cash ROI | (Annual Cash Return ÷ Total Investment) × 100 |
Step-by-Step Calculation
Here’s a complete walkthrough of rental property ROI.
Step 1: Identify Total Investment
Calculate every dollar you’ll invest upfront:
| Investment Category | Amount |
|---|---|
| Purchase Price | $275,000 |
| Down Payment (25%) | $68,750 |
| Closing Costs (3%) | $8,250 |
| Inspection & Appraisal | $900 |
| Initial Repairs | $14,100 |
| Reserve Fund | $5,000 |
| Cash Invested | $97,000 |
Calculation: $68,750 + $8,250 + $900 + $14,100 + $5,000 = $97,000
Step 2: Calculate Net Operating Income
Determine income before debt service:
| Income/Expense | Monthly | Annual |
|---|---|---|
| Gross Rental Income | $2,500 | $30,000 |
| Vacancy (5%) | -$125 | -$1,500 |
| Property Tax | -$300 | -$3,600 |
| Insurance | -$125 | -$1,500 |
| Maintenance (10%) | -$250 | -$3,000 |
| Property Management (8%) | -$200 | -$2,400 |
| NOI | $1,500 | $18,000 |
Calculation: $30,000 – $1,500 – $3,600 – $1,500 – $3,000 – $2,400 = $18,000
Step 3: Calculate Cash-on-Cash ROI
Subtract debt service and calculate ROI:
| Step | Calculation | Result |
|---|---|---|
| Annual Debt Service | $1,030 × 12 | $12,360 |
| Annual Cash Flow | $18,000 – $12,360 | $5,640 |
| Divide by investment | $5,640 ÷ $97,000 | 0.0581 |
| Convert to percentage | 0.0581 × 100 | 5.81% |
Final Answer: Your rental property ROI is 5.81%
What This Means
A 5.81% cash-on-cash return seems modest but represents only cash flow. Add appreciation (3%), principal reduction (2%), and tax benefits (1.5%) for a total return around 12.3%—competitive with most investments while building equity.
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