Investment Property ROI Calculator
Analyze your real estate profitability with precision.
How to Calculate Investment Property ROI
Evaluating a real estate deal requires more than just looking at the monthly rent. To understand the true Return on Investment (ROI), you must account for financing costs, operating expenses, and vacancy rates. This calculator provides three critical metrics for investors: Cash Flow, Cap Rate, and Cash-on-Cash (CoC) Return.
Understanding Key Investment Metrics
1. Cash Flow: This is the net amount of money moving in and out of your pocket each month. It is calculated by taking your total rental income and subtracting the mortgage payment (Principal & Interest), taxes, insurance, and maintenance reserves.
2. Cap Rate (Capitalization Rate): The Cap Rate measures the property's natural rate of return without considering financing. It is the Net Operating Income (NOI) divided by the purchase price. A "good" cap rate typically ranges between 4% and 10% depending on the market and risk level.
3. Cash-on-Cash Return: For most investors using leverage (mortgages), this is the most important number. It measures the annual cash flow relative to the actual cash you paid out of pocket (down payment and closing costs). If you put down $60,000 and earn $6,000 in annual cash flow, your CoC return is 10%.
Example Calculation
Imagine you buy a property for $300,000 with a 20% down payment ($60,000). If your monthly rent is $2,500 and your total monthly expenses (including the mortgage) are $2,100, your monthly cash flow is $400. Your annual cash flow is $4,800, resulting in an 8% Cash-on-Cash return ($4,800 / $60,000).
Factors That Impact Your ROI
Several variables can drastically change your investment's performance:
- Vacancy Rates: Even in hot markets, properties occasionally sit empty. Always factor in 5-10% for vacancies.
- Maintenance and CapEx: Roofs leak and water heaters fail. Setting aside a percentage of rent for future repairs is essential for long-term sustainability.
- Interest Rates: A 1% increase in mortgage rates can significantly reduce your monthly cash flow and lower your overall ROI.