Rental Property ROI Calculator
How to Calculate Rental Property ROI
Investing in real estate requires a clear understanding of the numbers. The Rental Property ROI (Return on Investment) calculator helps investors determine if a property will generate a positive cash flow and what the percentage return will be based on the initial cash invested.
The primary metric used here is Cash-on-Cash Return. This is calculated by taking your annual pre-tax cash flow and dividing it by the total cash invested (your down payment). Unlike simple cap rates, this metric accounts for the impact of financing (leverage).
The ROI Calculation Formula
To find your net return, we follow these steps:
- Loan Amount: Purchase Price – Down Payment.
- Monthly Mortgage: Calculated using the standard amortization formula for Principal and Interest.
- Monthly Operating Expenses: (Annual Taxes / 12) + (Annual Insurance / 12) + (Maintenance % of Rent).
- Monthly Cash Flow: Monthly Rent – (Mortgage + Operating Expenses).
- Annual ROI: (Monthly Cash Flow × 12) / Down Payment.
Example Calculation
Suppose you purchase a property for $250,000 with a 20% down payment ($50,000). Your monthly rent is $2,000. After paying your mortgage, taxes, insurance, and setting aside 10% for maintenance, let's say your net cash flow is $400 per month.
Your annual cash flow would be $4,800. Your Cash-on-Cash ROI would be $4,800 / $50,000 = 9.6%.
Why Cash Flow Matters More Than Appreciation
While property values generally increase over time, professional investors prioritize positive cash flow. Cash flow provides the liquidity to handle emergency repairs, vacancies, and economic downturns. A property with a high ROI ensures that your capital is working harder for you than it would in a traditional savings account or the stock market.