Calculating ROI on Rental Property
Learn how to calculate ROI on rental property with detailed walkthroughs of the formulas, metrics, and analysis steps used by professional investors.
How the Calculating ROI on Rental Property works
Step through detailed ROI calculation: acquisition costs, income analysis, operating expenses, and return metrics. Understand how each component affects your investment returns.
Understanding ROI calculation empowers you to evaluate properties quickly, negotiate better, and avoid overpaying. This educational tool teaches the process step-by-step.
How it works
Tutorial
Learning to calculate rental property ROI empowers you to evaluate opportunities quickly, negotiate effectively, and avoid overpriced properties. This tutorial teaches you the process with a complete walkthrough of a real example.
You can use the calculator above for guided learning with instant calculations, or follow this manual guide to understand the complete process.
The Formula
| Component | Formula |
|---|---|
| Total Investment | Down Payment + Closing + Repairs + Reserves |
| Annual Cash Return | NOI – Annual Mortgage Payment |
| Cash-on-Cash ROI | (Annual Cash Return ÷ Total Investment) × 100 |
Step-by-Step Calculation
Here’s a complete walkthrough of rental property ROI calculation.
Step 1: Calculate Total Investment
Add up every dollar you invest upfront:
| Investment Category | Amount |
|---|---|
| Purchase Price | $275,000 |
| Down Payment (25%) | $68,750 |
| Closing Costs (3%) | $8,250 |
| Inspection and Appraisal | $900 |
| Initial Repairs | $14,100 |
| Reserve Fund | $5,000 |
| Total 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 mortgage payments:
| Item | Monthly | Annual |
|---|---|---|
| Gross Rental Income | $2,500 | $30,000 |
| Vacancy Loss (5%) | -$125 | -$1,500 |
| Property Tax | -$300 | -$3,600 |
| Insurance | -$125 | -$1,500 |
| Maintenance (10%) | -$250 | -$3,000 |
| Property Management (8%) | -$200 | -$2,400 |
| Net Operating Income | $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 mortgage and calculate return:
| Step | Calculation | Result |
|---|---|---|
| Monthly Mortgage Payment | Given | $1,030 |
| Annual Mortgage Payment | $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 cash-on-cash ROI is5.81%
What This Means
A 5.81% cash-on-cash return represents only the cash flow portion of your return. When you add property appreciation (typically 3%), mortgage principal reduction (about 2%), and tax benefits (roughly 1.5%), your total annual return is around 12.3%-competitive with most investments while building equity.
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