Rental Property ROI Calculator
Analyze your real estate investment potential in seconds.
How to Calculate ROI on Rental Property
Investing in real estate is one of the most proven ways to build wealth, but the numbers must make sense. Before signing a mortgage, investors use a Rental Property ROI Calculator to determine if the property will be a "cash cow" or a "money pit."
Key Metrics Explained
1. Cash Flow: This is the amount of profit you have left each month after paying all operating expenses and the mortgage. Positive cash flow is essential for long-term sustainability.
2. Cap Rate (Capitalization Rate): This measures the property's natural rate of return without considering financing. It is calculated by dividing the Net Operating Income (NOI) by the purchase price. A cap rate of 5% to 10% is typical for many residential markets.
3. Cash on Cash Return: This is arguably the most important metric for investors using leverage. It calculates the annual return on the actual cash you invested (down payment and closing costs). If you put down $50,000 and earn $5,000 in annual cash flow, your cash-on-cash return is 10%.
Real-World Example
Imagine you purchase a duplex for $300,000 with a 20% down payment ($60,000). If the total monthly rent is $2,800 and your total expenses (mortgage, taxes, insurance, and maintenance) are $2,300, your monthly cash flow is $500.
Your annual cash flow would be $6,000. Dividing $6,000 by your initial $60,000 investment gives you a 10% Cash on Cash Return. This outperforms most traditional savings accounts and many index funds.
The 1% Rule
Many investors use the "1% Rule" as a quick screening tool. This rule suggests that a property should rent for at least 1% of its purchase price. For a $200,000 home, you should look for $2,000 in monthly rent. While harder to find in today's market, it remains a gold standard for high-yield investing.