Real Estate ROI & Cap Rate Calculator
Analyze your potential property investment returns quickly and accurately.
How to Calculate Real Estate ROI
Return on Investment (ROI) is a critical metric for real estate investors. It measures the efficiency of an investment by comparing the gain or loss generated relative to the amount of money invested. To calculate ROI accurately, you must account for all income sources and every operating expense.
The Difference Between Cap Rate and ROI
While often used interchangeably, they serve different purposes:
- Cap Rate (Capitalization Rate): This is the ratio of Net Operating Income (NOI) to the property asset value. It helps compare different properties regardless of how they are financed (cash vs. mortgage).
- ROI (Return on Investment): In this calculator, we focus on the total annual return. If you pay in cash, your ROI and Cap Rate are very similar. If you use leverage (a mortgage), your ROI changes based on your actual cash out of pocket.
Real-World Example
Imagine you purchase a rental property for $250,000. You charge $2,000 per month in rent.
1. Gross Annual Income: $2,000 x 12 = $24,000.
2. Operating Expenses: Let's say Taxes ($3,000), Insurance ($1,000), and Repairs ($1,200) total $5,200.
3. Net Operating Income (NOI): $24,000 – $5,200 = $18,800.
4. Cap Rate: ($18,800 / $250,000) x 100 = 7.52%.
Important Factors to Consider
When using a real estate ROI calculator, don't forget hidden costs like vacancy rates (the time the property sits empty) and property management fees. A conservative investor usually budgets 5-10% for repairs and another 5% for vacancies to ensure the ROI projections remain realistic over the long term.