Investing in real estate requires more than just buying a property and collecting rent. To ensure your investment is profitable, you must analyze key performance metrics. This Rental Property ROI Calculator helps you determine the viability of a potential investment by calculating Cash Flow, Cap Rate, and Cash on Cash Return.
Key Metrics Explained
1. Cash Flow
Cash flow is the net amount of money moving in and out of your rental business. It is calculated by subtracting all expenses (mortgage, taxes, insurance, repairs) from your total rental income.
Goal: Positive cash flow ensures the property pays for itself and generates income.
2. Cap Rate (Capitalization Rate)
Cap Rate measures the natural rate of return on an investment property, assuming it was bought entirely with cash. It is useful for comparing the profitability of different properties regardless of financing.
Formula:(Net Operating Income / Purchase Price) × 100
3. Cash on Cash Return (CoC ROI)
This is arguably the most important metric for investors using leverage (loans). It measures the annual return on the actual cash you invested (down payment + closing costs), not the total property price.
Formula:(Annual Cash Flow / Total Cash Invested) × 100
Example Scenario
The Setup: You buy a property for $250,000. You put $50,000 down and pay $5,000 in closing costs. Your total cash invested is $55,000.
Monthly Rent: $2,200
Mortgage Payment: ~$1,264 (at 6.5% interest)
Other Expenses: $600 (Taxes, Insurance, HOA)
The Math:
Total Monthly Cost: $1,864
Monthly Cash Flow: $2,200 – $1,864 = $336
Annual Cash Flow: $336 × 12 = $4,032
Cash on Cash ROI: ($4,032 / $55,000) = 7.33%
How to Improve Your ROI
If your calculation shows a negative cash flow or low ROI, consider these strategies:
Negotiate Price: A lower purchase price reduces your mortgage and increases Cap Rate.
Increase Rent: Small cosmetic improvements can justify higher monthly rent.
Reduce Vacancy: Long-term tenants reduce turnover costs and vacancy losses.