Rental Property ROI Calculator
Analyze real estate investments by calculating cash flow, Cap Rate, and Cash-on-Cash return.
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Net Operating Income (Annual)
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How to Calculate Rental Property Return on Investment (ROI)
Investing in real estate is one of the most proven ways to build wealth, but not every property is a winner. To determine if a rental property is a sound investment, you must look beyond the monthly rent and analyze the underlying financial metrics.
Pro Tip: Most successful real estate investors look for a "Cash-on-Cash Return" of 8% or higher, depending on the market and risk profile.
Key Real Estate Metrics Explained
- Net Operating Income (NOI): This is your total annual income minus all operating expenses (taxes, insurance, repairs, property management), but before debt service (mortgage).
- Cap Rate (Capitalization Rate): Calculated as Annual NOI divided by the Purchase Price. It helps compare different properties regardless of how they are financed.
- Cash-on-Cash Return: This is the "yield" on the actual money you out of pocket. It is the annual pre-tax cash flow divided by the total cash invested (down payment + closing costs).
- Operating Expense Ratio: Usually ranges from 35% to 50%. This accounts for everything that keeps the building running.
Example ROI Calculation
Imagine you buy a property for $250,000 with 20% down ($50,000). Your monthly rent is $2,000. After accounting for a 5% vacancy rate and 35% operating expenses, your monthly expenses are $800. If your mortgage is $1,100, your monthly cash flow is $100.
In this scenario, your annual cash flow is $1,200. If your total investment was $55,000 (down payment + closing costs), your Cash-on-Cash return is 2.18%.
The Importance of Vacancy Rates
Many novice investors forget to account for vacancy. Even in "hot" markets, properties sit empty between tenants for cleaning and repairs. A standard 5% vacancy rate assumes roughly 18 days of vacancy per year. Calculating this into your ROI ensures you have a realistic expectation of your profit margins.