Rental Property ROI Calculator
How to Calculate Rental Property ROI
Investing in real estate requires a clear understanding of your potential Return on Investment (ROI). This calculator helps you determine if a rental property is a "deal" or a "dud" by analyzing your cash flow and yield metrics.
Key Metrics Explained
1. Monthly Cash Flow: This is the "take-home" profit after every single expense (mortgage, taxes, insurance, and maintenance) has been paid. Positive cash flow is essential for long-term sustainability.
2. Cap Rate (Capitalization Rate): This measures the property's natural rate of return without considering financing. It is calculated as Net Operating Income (NOI) divided by the Purchase Price. It allows you to compare different properties on an even playing field.
3. Cash on Cash Return: This is often the most important metric for investors using leverage (mortgages). It measures the annual cash flow relative to the actual cash you invested (your down payment).
Example Calculation
Imagine you buy a property for $200,000 with 20% down ($40,000). If your total monthly expenses (including the mortgage) are $1,200 and you collect $1,600 in rent, your monthly cash flow is $400. Annually, that is $4,800. Your Cash on Cash return would be $4,800 / $40,000 = 12%.
Why Maintenance Matters
Many novice investors forget to budget for repairs. We recommend setting aside 5-10% of the monthly rent for maintenance and capital expenditures (CapEx) like roof repairs or water heater replacements. This ensures your ROI remains realistic over the long term.