Rental Property ROI Calculator
Analyze potential real estate investments in seconds.
How to Calculate ROI on Rental Property
Calculating the Return on Investment (ROI) for a rental property is essential for any real estate investor. It helps you determine if a deal is worth your capital or if you should move on to the next opportunity. This calculator uses three primary metrics: Cap Rate, Cash Flow, and Cash on Cash Return.
1. Net Operating Income (NOI)
NOI is the total income generated by the property minus all necessary operating expenses (excluding mortgage payments). To find your annual NOI, multiply your monthly rent by 12 and subtract your annual expenses (insurance, property taxes, maintenance, and vacancy allowances).
2. Cap Rate (Capitalization Rate)
Cap rate is used to compare different real estate investments without considering the financing (mortgage). It is calculated as: (Annual NOI / Purchase Price) x 100. A "good" cap rate varies by market, but typically ranges between 4% and 10%.
3. Cash on Cash Return
This is often considered the most important metric for investors using leverage. It measures the annual cash flow relative to the actual cash you invested (down payment and closing costs). The formula is: (Annual Pre-Tax Cash Flow / Total Cash Invested) x 100.
Real-Life Example Analysis
Suppose you buy a property for $300,000 with a 20% down payment ($60,000). Your monthly rent is $2,200 and expenses are $500. If your mortgage is $1,400, your monthly cash flow is $300 ($2,200 – $500 – $1,400).
- Annual Cash Flow: $3,600
- Cash on Cash Return: 6% ($3,600 / $60,000)
While the property might appreciate in value over time, ensuring positive monthly cash flow provides a safety net against market volatility and covers unexpected repairs.