Rental Property ROI Calculator
Determine the profitability of your real estate investment instantly.
Investment Summary
How to Calculate Rental Property ROI
Investing in real estate requires a deep understanding of your numbers. This Rental Property ROI Calculator helps you evaluate the potential profitability of a property by looking at two primary metrics: Cap Rate and Cash-on-Cash Return.
1. Capitalization Rate (Cap Rate)
The Cap Rate is used to compare different real estate investments. It is calculated by taking the Annual Net Operating Income (NOI) and dividing it by the purchase price. Note that Cap Rate does not take financing (mortgages) into account, allowing you to compare properties on an "all-cash" basis.
Formula: (Annual NOI / Purchase Price) x 100
2. Cash-on-Cash (CoC) Return
This is arguably the most important metric for investors using leverage (mortgages). It measures the annual cash flow relative to the actual amount of cash you invested out of pocket (down payment, closing costs, and repairs).
Formula: (Annual Cash Flow / Total Cash Invested) x 100
Example Calculation
Imagine you buy a property for $250,000. You spend $10,000 on closing and $15,000 on repairs. Your total investment is $275,000 (if paying cash) or your down payment + costs if financing.
If the monthly rent is $2,000 and your total expenses (mortgage, tax, insurance) are $1,400, your monthly cash flow is $600. Your annual cash flow would be $7,200. If your out-of-pocket cash was $75,000, your CoC return would be 9.6%.
Key Factors for a Good ROI
- Location: High-demand areas typically offer lower cap rates but higher appreciation potential.
- Property Management: Professional management costs usually range from 8% to 12% of monthly rent.
- Maintenance: Always budget 1% of the property value annually for repairs.
- Vacancy Rate: Factor in at least a 5% vacancy rate to stay realistic.