Rental Property ROI Calculator
How to Calculate Rental Property ROI
Return on Investment (ROI) is the most critical metric for real estate investors. It measures the efficiency of an investment or compares the efficiencies of several different investments. In rental property terms, we often look specifically at "Cash on Cash Return."
The Formula for Cash on Cash Return
To find your Cash on Cash Return, you divide your annual pre-tax cash flow by the total amount of cash invested. The formula looks like this:
(Annual Cash Flow / Total Cash Invested) x 100 = ROI %
Example Calculation
Imagine you buy a property for $200,000. You pay $5,000 in closing costs and spend $10,000 on repairs. Your total investment is $215,000.
If the property rents for $2,000 a month, and your total expenses (mortgage, taxes, insurance, repairs) are $1,500, your monthly cash flow is $500. This equals $6,000 per year.
Calculation: ($6,000 / $215,000) x 100 = 2.79% ROI.
What is a Good ROI for Rental Property?
While "good" is subjective, many real estate investors aim for a 10% to 12% cash on cash return. However, in high-appreciation markets, investors might accept a 5% ROI if they expect the property's value to increase significantly over time. It is important to account for vacancy rates (typically 5-10%) and a maintenance reserve when calculating your monthly expenses to ensure your ROI estimate is realistic.
Key Factors Affecting Your ROI
- Location: Influences both rental demand and property appreciation.
- Operating Expenses: High property taxes or HOA fees can quickly eat into your profits.
- Financing: Interest rates on your mortgage significantly impact monthly cash flow.
- Property Management: If you hire a manager, they typically charge 8-12% of the monthly rent.