Rental Property ROI Calculator
Analyze your real estate investment's profitability and cash flow.
How to Calculate Rental Property ROI
Understanding the Return on Investment (ROI) for a rental property is essential for any real estate investor. Unlike stock market investments, real estate ROI involves multiple factors including financing costs, operating expenses, and gross rental income.
1. Net Operating Income (NOI)
NOI is the total income generated by the property after deducting all necessary operating expenses (property taxes, insurance, maintenance, property management fees). Crucially, NOI does not include mortgage payments.
Formula: Annual Rental Income – Annual Operating Expenses = NOI
2. Cap Rate (Capitalization Rate)
The Cap Rate is used to estimate the potential return on an investment property without considering financing. It represents the yield of a property over a one-year time horizon assuming the property was purchased in cash.
Formula: (NOI / Purchase Price) x 100
Real-World Example
Imagine you buy a property for $250,000 with 20% down ($50,000).
- Monthly Rent: $2,200
- Monthly Expenses: $500
- Mortgage Payment: $1,300
Your Monthly Cash Flow would be $2,200 – $500 – $1,300 = $400.
Your Annual Cash Flow is $4,800. Since you invested $50,000 upfront, your Cash on Cash Return is 9.6%.
3. Cash on Cash Return
This is often considered the most important metric for investors using leverage (mortgages). It measures the annual cash flow relative to the actual "out-of-pocket" cash invested (down payment and closing costs).
Formula: (Annual Pre-Tax Cash Flow / Total Cash Invested) x 100
Why ROI Matters in Real Estate
Calculating ROI allows you to compare different properties objectively. A property in a high-appreciation area might have a lower immediate ROI but higher long-term gains, while a "cash flow" property might provide immediate monthly income. Use this calculator to ensure your investment meets your financial goals before you sign the contract.