Rental Property ROI Calculator
Investment Analysis
How to Calculate Rental Property ROI
Understanding your Return on Investment (ROI) is the most critical step in real estate investing. This calculator helps you determine if a rental property will generate positive cash flow or if it will become a "money pit." To accurately calculate your potential returns, we look at several key metrics.
Key Metrics Explained
1. Cash-on-Cash Return: This is the ratio of annual before-tax cash flow to the total amount of cash invested. It is often considered the most important metric for rental investors because it tells you exactly what your "cash" is earning you compared to a savings account or the stock market.
2. Capitalization Rate (Cap Rate): This measures the profitability of a property without considering financing. It is calculated by dividing the Net Operating Income (NOI) by the purchase price. It is useful for comparing different real estate opportunities quickly.
Real-World Example
Imagine you buy a property for $300,000 with a 20% down payment ($60,000). Your monthly rent is $2,500. After paying your mortgage, taxes, insurance, and setting aside money for maintenance, you have $400 left over each month.
- Annual Cash Flow: $400 x 12 = $4,800
- Cash-on-Cash Return: $4,800 / $60,000 = 8%
In this scenario, an 8% return is generally considered a solid investment in many real estate markets.
Common Expenses to Include
Many novice investors fail because they only consider the mortgage. To get an accurate ROI, you must include:
- Property Taxes: Usually 1% to 2% of property value annually.
- Insurance: Landlord-specific policies are required.
- Maintenance Reserve: We recommend setting aside 5-10% of gross rent for repairs.
- Vacancy Rate: Expect the property to be empty at least 5% of the year (about 2-3 weeks).