How to Calculate Rental Property ROI

How it works

Tutorial

Rental property investment seems straightforward—buy a house, rent it out, collect profits—but accurate ROI calculation separates profitable investments from money pits. Most amateur investors calculate ROI incorrectly by ignoring expenses like maintenance, vacancies, property management, and capital expenditures. They see $2,000 monthly rent on a $300,000 property and think “8% annual return!” without realizing actual net cash flow is $400/month after all expenses. Professional ROI calculation accounts for every cost and uses multiple metrics to reveal true investment performance.

Understanding comprehensive rental ROI prevents expensive mistakes. A property showing 12% ROI based on gross rent might actually deliver 4% ROI after expenses—barely better than stocks but with far more risk and work. Learning to calculate cash-on-cash return, cap rate, total return (including appreciation and tax benefits), and cash flow helps investors compare properties accurately and make data-driven decisions instead of emotional ones driven by real estate hype.

The Basic Formula

Step-by-Step Calculation

Example: $320,000 purchase price, $64,000 down payment (20%), $2,400 monthly rent, 5% vacancy rate, $8,500 annual expenses, $1,850 monthly mortgage (P&I), 3% appreciation

Step 1: Calculate Annual Income and Expenses

Step 2: Calculate Cash Flow and NOI

Step 3: Calculate ROI Metrics

What This Means

This rental property shows negative $610/month cash flow (you pay $610 out-of-pocket monthly to own it), which seems terrible until you calculate total return. The -10.4% cash-on-cash return means you’re losing money on operations, but appreciation ($9,600), mortgage paydown ($3,200), and tax benefits ($3,000) create $8,478 total annual benefit—a 12% total ROI on your $70,400 investment. This is typical for rental properties in appreciating markets: negative or minimal cash flow offset by equity buildup and tax advantages.

However, negative cash flow creates risk—if you lose your job or face major repairs, you must cover the gap from other income. The 4.6% cap rate is low, indicating an expensive market where investors accept poor operating returns hoping for appreciation. If appreciation slows to 1% instead of 3%, total ROI drops to 5.6%—barely better than risk-free bonds. This property only makes sense if: 1) You have emergency reserves to cover negative cash flow, 2) You believe appreciation will continue, 3) You value forced savings via mortgage paydown. A property with positive $400/month cash flow and 2% appreciation might provide superior risk-adjusted returns.