Rental Property ROI Calculator
Understanding Rental Property ROI
Investing in real estate is one of the most reliable ways to build wealth, but simply buying a property doesn't guarantee a profit. To succeed, investors must accurately calculate their Return on Investment (ROI). This Rental Property ROI Calculator is designed to help you analyze the profitability of a potential investment by factoring in mortgage costs, taxes, insurance, and maintenance.
What is Cash on Cash Return?
While there are many metrics to evaluate a property, Cash on Cash Return is arguably the most important for investors using leverage (a mortgage). It measures the annual cash income earned on the property against the actual cash you invested (your down payment plus closing costs).
Formula: (Annual Pre-Tax Cash Flow / Total Cash Invested) x 100
A "good" Cash on Cash return varies by market, but many investors look for yields between 8% and 12% to justify the illiquidity of real estate assets.
How to Calculate Cash Flow
Positive cash flow is the lifeline of any rental business. It represents the money left over after all expenses are paid. Our calculator derives this number using the following variables:
- Gross Income: The total rent collected monthly.
- Operating Expenses: Taxes, insurance, HOA fees, and maintenance.
- Debt Service: Your monthly principal and interest payments.
If your calculation results in negative cash flow, the property is a liability rather than an asset, meaning you must pay out of pocket every month to keep it.
Cap Rate vs. ROI
You will notice our calculator also provides the Cap Rate (Capitalization Rate). The Cap Rate measures the natural rate of return of the property assuming it was bought entirely with cash (no loan). It is calculated by dividing the Net Operating Income (NOI) by the Purchase Price. This metric helps you compare the profitability of the building itself, separate from your financing method.