Rental Property ROI Calculator
How to Calculate Rental Property ROI
Understanding your Return on Investment (ROI) is the difference between a profitable real estate portfolio and a financial burden. This calculator helps you determine two critical metrics: the Cash-on-Cash Return and the Cap Rate.
1. Cash-on-Cash Return
This metric measures the annual cash flow relative to the actual amount of cash you invested. The formula is:
(Annual Cash Flow / Total Initial Investment) x 100
It is vital for investors who use financing, as it shows the return on the specific dollars out of their own pocket.
2. Cap Rate (Capitalization Rate)
The Cap Rate evaluates the property's natural yield regardless of financing. It is calculated as:
(Net Operating Income / Purchase Price) x 100
This allows you to compare the profitability of different properties on an even playing field, assuming they were bought with cash.
Example Calculation
Imagine you buy a condo for $200,000. You spend $5,000 on closing and $5,000 on new carpets (Total Investment: $210,000). You rent it for $1,800/month. Your expenses (taxes, insurance, HOA) are $500/month and your mortgage is $800/month.
- Annual Income: $1,800 * 12 = $21,600
- Annual Expenses (including mortgage): ($500 + $800) * 12 = $15,600
- Annual Cash Flow: $6,000
- Cash-on-Cash Return: ($6,000 / $210,000) = 2.85%