How to Calculate ROI on a Rental Property: Formula and Example

The Basic ROI Formula

Return on investment compares what a property pays you each year to the cash you put in to acquire it. For a rental, the annual return is usually the yearly cash flow after operating expenses and any mortgage payment. Total cash invested includes the down payment, closing costs, and upfront repairs.

The formula looks simple, but the two inputs are where investors disagree. Whether you count loan paydown and appreciation in the return, and whether you use purchase price or cash invested in the denominator, changes the answer dramatically. The key is to define the version you are using and apply it consistently across deals.

ROI on a Cash Purchase

With no mortgage, ROI is straightforward. Suppose you pay $200,000 cash for a property plus $5,000 in closing costs and $10,000 in initial repairs, for $215,000 total invested. If it rents for $1,800 per month and operating expenses, vacancy, and management take $650 per month, annual cash flow is $13,800.

Dividing $13,800 by $215,000 gives an ROI of about 6.4%. For an all-cash deal, this number is essentially the same as the net yield on total cost, and it is close to the cap rate on the acquisition.

ROI on a Financed Purchase

Financing changes both sides of the fraction. Take the same $200,000 property with 25% down. Cash invested is now $50,000 down plus $5,000 closing costs and $10,000 repairs, or $65,000. A $150,000 loan at 7% over 30 years costs about $998 per month, so annual cash flow drops to roughly $1,820.

ROI is now $1,820 divided by $65,000, or about 2.8% in pure cash terms. But the tenant also pays down around $1,520 of loan principal in year one. Counting equity paydown, the return rises to about 5.1% before any appreciation. This financed version of cash ROI is what investors call cash-on-cash return.

What to Include in the Return

• Cash flow: rent minus vacancy, operating expenses, and debt service. The most conservative and most common basis.
• Principal paydown: equity the tenant builds for you each year. Real return, but not spendable until sale or refinance.
• Appreciation: market value growth. The least predictable component, so many investors model it separately rather than counting it in ROI.
• Tax effects: depreciation and deductions can change after-tax returns significantly, but they depend on your personal situation.

What Is a Good ROI on a Rental Property?

There is no universal threshold. Many investors look for cash-on-cash returns in the 6% to 10% range, but the right benchmark depends on the market, the risk of the property, how much work it requires, and what alternative investments pay.

A stable property in a strong rental market may justify a lower cash return because loan paydown and appreciation carry more of the total. A rough property in a declining area needs a much higher cash return to compensate for risk. Compare deals against local comparables and against your own opportunity cost, not against a single national number.

Common ROI Mistakes

• Using purchase price instead of total cash invested for a financed deal, which understates leveraged returns.
• Skipping vacancy, repairs, management, and CapEx reserves, which overstates cash flow.
• Counting projected appreciation as if it were guaranteed annual income.
• Comparing an all-cash ROI to a leveraged cash-on-cash return without noting that leverage changes the risk.
• Ignoring the cash tied up in closing costs and initial repairs, which can add 5% to 10% to the real investment.

Frequently Asked Questions