Rental Property ROI Calculator
Estimate your potential returns, cash flow, and capitalization rate.
How to Calculate Rental Property ROI
Investing in real estate requires a clear understanding of the numbers. Return on Investment (ROI) helps you compare different properties and decide where your capital is best deployed. There are three primary metrics every landlord should track:
1. Cash Flow
Cash flow is the amount of profit you have left at the end of the month after all operating expenses and mortgage payments have been made. Positive cash flow is essential for long-term sustainability. It is calculated as: Gross Rent – (Mortgage + Taxes + Insurance + Maintenance + Vacancy).
2. Capitalization Rate (Cap Rate)
The Cap Rate is used to estimate the investor's potential return on an investment property, excluding financing costs. This allows you to compare properties regardless of whether you are paying cash or using a loan. The formula is: Net Operating Income (NOI) / Purchase Price.
3. Cash-on-Cash Return
This is often considered the most important metric for investors using leverage (mortgages). It measures the annual cash flow relative to the actual amount of cash you invested (down payment and closing costs). Formula: Annual Pre-Tax Cash Flow / Total Cash Invested.
Example Calculation
Imagine you buy a property for $200,000 with a 20% down payment ($40,000). If your net annual cash flow is $4,000, your Cash-on-Cash return would be 10%. This means for every dollar you put down, you are earning 10 cents per year in pure profit, plus any equity build-up or appreciation.