How to Calculate Rental Property ROI
Stop losing money on bad properties. Learn the exact ROI calculation method that reveals which rental investments actually make money.
How the How to Calculate Rental Property ROI works
Calculate your complete returns: property income, all expenses, mortgage costs, and hidden fees. Get the real profit numbers before you invest.
Most investors calculate rental ROI wrong and lose money. This shows you the professional method that reveals true returns.
How it works
Tutorial
Most people think rental property investing is simple: buy a house, rent it out, collect profits. But without proper ROI calculation, you might be losing money every month without realizing it. Many amateur investors see $2,000 monthly rent on a $300,000 property and think they’re getting an 8% return. They forget about maintenance, vacancies, property management, and repairs. After all expenses, their actual profit might only be $400/month – a completely different story.
Learning proper ROI calculation prevents expensive mistakes. A property that looks like it has a 12% return based on rent alone might actually deliver just 4% after expenses. That’s barely better than safer investments, but with much more work and risk. This guide shows you how to calculate the real numbers so you can make smart investment decisions.
The Basic Formulas
| What It Measures | Formula | Why It Matters |
|---|---|---|
| Cash-on-Cash Return | Annual Cash Flow / Total Cash Invested | Shows return on your actual money invested |
| Cap Rate | Net Operating Income / Purchase Price | Shows how the property performs (no financing) |
| Total ROI | (Cash Flow + Home Value Increase + Tax Savings) / Investment | Shows your complete annual return |
| Net Cash Flow | Rent – (Mortgage + All Expenses + Vacancy + Repairs) | Shows your actual monthly profit |
Step-by-Step Example
Property Details:$320,000 purchase price, $64,000 down payment (20%), $2,400 monthly rent, 5% vacancy rate, $1,850 monthly mortgage, 3% annual home value increase
Step 1: Calculate Your Annual Income and Expenses
| Item | Calculation | Annual Amount |
|---|---|---|
| Monthly Rent | $2,400 x 12 | $28,800 |
| Vacancy Loss (5%) | $28,800 x 0.05 | -$1,440 |
| Actual Rental Income | $28,800 – $1,440 | $27,360 |
| Property Tax | Annual bill | -$3,800 |
| Insurance | Annual premium | -$1,200 |
| Maintenance (8% of rent) | $28,800 x 0.08 | -$2,304 |
| Property Management (9%) | $27,360 x 0.09 | -$2,462 |
| HOA Fees | $60/month x 12 | -$720 |
| Repair Fund (for roof, HVAC, etc.) | Monthly savings | -$2,000 |
| Total Annual Expenses | Sum all expenses | -$12,486 |
Step 2: Calculate Your Cash Flow
| Item | Calculation | Amount |
|---|---|---|
| Actual Rental Income | From Step 1 | $27,360 |
| Operating Expenses | From Step 1 | -$12,486 |
| Net Operating Income | Income – Expenses | $14,874 |
| Mortgage Payment | $1,850 x 12 | -$22,200 |
| Annual Cash Flow | $14,874 – $22,200 | -$7,326 |
| Monthly Cash Flow | Annual / 12 | -$611 |
Step 3: Calculate Your ROI
| ROI Type | Calculation | Result |
|---|---|---|
| Total Cash Invested | Down payment + closing costs | $64,000 + $6,400 = $70,400 |
| Annual Cash Flow | From Step 2 | -$7,326 |
| Cash-on-Cash Return | -$7,326 / $70,400 | -10.4% |
| Cap Rate | $14,874 / $320,000 | 4.6% |
| Annual Home Value Increase | $320,000 x 0.03 | $9,600 |
| Mortgage Principal Paid Down | Year 1 principal portion | $3,200 |
| Tax Benefit (estimated) | ~$3,000 value in 24% bracket | $3,000 |
| Total Annual Return | -$7,326 + $9,600 + $3,200 + $3,000 | $8,474 |
| Total ROI Percentage | $8,474 / $70,400 | 12.0% |
What This Means
This property loses $611 every month in cash flow, meaning you’d need to pay that amount out of your own pocket to own it. The cash-on-cash return is -10.4%, which looks terrible. However, when you include home value increases ($9,600), mortgage paydown ($3,200), and tax benefits ($3,000), your total annual benefit is $8,474 – that’s a 12% total ROI on your $70,400 investment.
This is common for rental properties in expensive markets: you lose money on monthly operations but gain from home value increases and tax advantages. However, negative cash flow is risky. If you lose your job or face major repairs, you must cover that monthly gap from other income. The 4.6% cap rate is low, indicating this is an expensive market where investors bet on future home value increases.
If home values increase only 1% instead of 3%, your total ROI drops to 5.6% – barely better than safe bonds. This property only makes sense if you: 1) Have emergency savings to cover negative cash flow, 2) Believe home values will continue rising, 3) Have stable income to handle the monthly loss. A property with positive $400/month cash flow and 2% home value growth might be a safer choice.
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