Real Estate ROI Calculator
Calculate the potential Return on Investment (ROI) for your rental property acquisition.
Investment Summary
How to Calculate Real Estate ROI
Return on Investment (ROI) is the most critical metric for real estate investors. It measures the efficiency of an investment by comparing the amount of return relative to the cost. In rental real estate, we specifically look at the Cash-on-Cash return, which accounts for the actual cash out of pocket.
The ROI Formula
The basic formula used in this calculator is:
ROI = (Annual Net Operating Income / Total Investment Cost) x 100
Key Definitions
- Total Investment Cost: This includes the purchase price, all closing costs (legal fees, inspections, title insurance), and any immediate repairs or renovations needed to make the property rent-ready.
- Net Operating Income (NOI): This is your gross annual rental income minus all operating expenses (property taxes, insurance, maintenance, property management, and vacancy allowances). Note that NOI typically does not include mortgage interest if you are calculating property performance.
- Cap Rate: The Capitalization Rate compares the NOI to the original purchase price (excluding closing costs and repairs) to provide a snapshot of the property's natural yield.
Example Calculation
Imagine you purchase a duplex for $400,000. You pay $8,000 in closing costs and spend $12,000 on new flooring and paint. Your total investment is $420,000.
If the property rents for $3,200 per month and your total monthly expenses (including a 5% vacancy reserve) are $1,000, your monthly cash flow is $2,200.
Your Annual Net Operating Income would be $26,400. Dividng $26,400 by your $420,000 investment gives you an ROI of 6.28%.
What is a "Good" ROI?
A "good" ROI varies by market and risk tolerance. Generally, real estate investors look for a return between 6% and 12%. Properties in high-growth areas might have lower immediate ROI but higher appreciation potential, while properties in "turnaround" neighborhoods may offer 15%+ ROI but carry higher vacancy and maintenance risks.