Rental Property ROI Calculator
Investment Summary
Understanding Rental Property ROI: A Guide for Investors
Investing in real estate is one of the most proven ways to build long-term wealth, but success hinges on your ability to accurately calculate the Return on Investment (ROI). A property might look like a bargain, but once you factor in taxes, insurance, and vacancy rates, the "profit" can quickly disappear.
How to Use the Rental ROI Calculator
To get an accurate picture of your potential investment, you need to input realistic numbers. Here's what each field represents:
- Purchase Price: The total price you are paying for the property.
- Down Payment & Closing Costs: Your "Cash Out of Pocket." Closing costs typically range from 2% to 5% of the purchase price.
- Maintenance & CapEx: Experienced investors set aside 10-15% of rent for repairs (Maintenance) and big-ticket items like new roofs (Capital Expenditures).
- Vacancy Rate: No property is occupied 100% of the time. Factoring in a 5-8% vacancy rate (about one month per year) is a safe planning strategy.
Key Metrics Explained
1. Cash-on-Cash Return
This is arguably the most important metric for rental investors. It measures the annual cash flow relative to the actual cash you invested (down payment + closing costs). Formula: (Annual Cash Flow / Total Cash Invested) x 100.
2. Cap Rate (Capitalization Rate)
The Cap Rate shows the property's profitability regardless of the mortgage. It helps compare different properties as if they were purchased with 100% cash. Formula: (Net Operating Income / Purchase Price) x 100.
Real-World Example
Let's say you buy a duplex for $300,000. You put 20% down ($60,000) and pay $9,000 in closing costs, for a total of $69,000 cash invested.
If the total rent is $2,500/month and your total expenses (mortgage, taxes, insurance, maintenance) are $2,100, your monthly cash flow is $400. Your annual cash flow is $4,800. Your Cash-on-Cash return would be 6.95% ($4,800 / $69,000).
Is a 7% ROI Good?
In most markets, a Cash-on-Cash return between 8% and 12% is considered excellent. However, in high-appreciation areas (like coastal cities), investors might accept a 3-5% ROI because they expect the property value to increase significantly over time.