How to Calculate ROI on a Rental Property

How it works

Tutorial

Rental property ROI mastery separates successful investors who build wealth from amateurs who struggle with difficult tenants and negative cash flow. Understanding multiple ROI metrics—cash-on-cash return, cap rate, total return, and cash flow—provides complete picture of investment performance. A property showing 15% simple ROI might actually deliver 5% cash-on-cash if you’re highly leveraged, or it might provide 25% total return when including appreciation and tax benefits. Each metric reveals different aspects of investment quality and helps optimize buying, holding, and selling decisions.

Real estate’s unique advantage is leverage—controlling $400K in assets with $80K down payment amplifies returns but also magnifies risk. Proper ROI calculation accounts for financing impact, operating expenses, capital expenditures, vacancy rates, and tax implications. Investors who master these calculations make better purchase decisions, negotiate confidently, and know exactly when to sell. This comprehensive knowledge prevents the common mistake of buying properties based on emotion or realtor promises and builds wealth through data-driven investment selection.

The Basic Formula

Step-by-Step Calculation

Example: $280,000 duplex, $56,000 down (20%), $2,200 total monthly rent, $1,530 mortgage payment, $6,800 annual expenses, 4% vacancy, 2.5% appreciation, 24% tax bracket

Step 1: Calculate Annual Operating Performance

Step 2: Calculate Cash Flow and Primary ROI Metrics

Step 3: Calculate Total Return (All Benefits)

What This Means

This duplex shows slightly negative cash flow (-$25/month) but delivers strong 19.9% total ROI when including all benefits. The -0.5% cash-on-cash return seems poor, but appreciation ($7,000), mortgage paydown ($3,121), and tax benefits ($2,440) create $12,261 annual wealth increase on your $61,600 investment. The 6.4% cap rate indicates decent property performance independent of financing—above the 5-6% typical for residential rentals in many markets.

Understanding component breakdown reveals this is an appreciation play: 57% of returns come from property value increase, 25% from forced savings via mortgage paydown, 20% from tax shields, and actually losing 2% on operations. This profile suits investors with stable income to cover negative cash flow and long-term outlook to capture appreciation. If appreciation drops to 1% instead of 2.5%, total ROI falls to 12.6%—still acceptable but much less compelling. A true cash flow investor should seek properties with positive $200-400/month cash flow even if appreciation is minimal. Your investment strategy should match the property’s return profile.