How to Calculate Rental Property Return on Investment (ROI)
Investing in real estate is one of the most proven ways to build wealth, but the numbers must make sense. Professional investors use several key metrics to determine if a property is a "deal" or a "dud." Our calculator automates these complex formulas to help you make data-driven decisions.
Key Metrics Explained
Cap Rate (Capitalization Rate): This measures the property's natural rate of return without considering financing. It is calculated by dividing the Net Operating Income (NOI) by the purchase price. A cap rate of 5-8% is often considered healthy in stable markets.
Cash on Cash Return (CoC): This is the most important metric for investors using leverage. It measures the annual cash flow relative to the actual cash you paid out of pocket (down payment and closing costs).
Net Operating Income (NOI): This is your total income minus all operating expenses (taxes, insurance, maintenance). It does NOT include your mortgage payment.
Monthly Cash Flow: This is the money left in your pocket every month after every single expense and the mortgage has been paid.
Realistic Example
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 expenses (including mortgage, taxes, and insurance) are $2,100, your monthly cash flow is $400.
Your annual cash flow would be $4,800. To find your Cash on Cash return, you divide $4,800 by your initial $60,000 investment, resulting in an 8% CoC return.
Why Use This Calculator?
Rental property math involves moving parts like interest compounding and expense ratios. Small errors in calculation can lead to buying a property that actually loses money every month (negative cash flow). Use this tool to stress-test your assumptions before making an offer.