How do I calculate ROI on a rental property?

ROI answers one question. For every dollar of your own cash in the deal, how much does the property return each year? The core formula is simple.

• Annual return: your yearly cash flow, sometimes plus equity gains.
• Cash invested: down payment, closing costs, and upfront repairs.
• ROI: annual return divided by cash invested, times one hundred.

The denominator matters as much as the return. ROI measures performance on the cash you actually committed, not the full price of the property, so your financing changes the result.

Investors use two common versions, and confusing them leads to bad comparisons. Decide which one you mean before you quote a number.

• Cash-on-cash return divides annual pre-tax cash flow by the cash you invested. It shows what the property pays you in real dollars each year.
• Total ROI adds the wealth you build beyond cash flow: appreciation, the loan balance your tenant pays down, and tax savings.

Cash-on-cash is the honest test of monthly performance. Total ROI captures long-term wealth, but it leans on estimates for appreciation and future value, so treat it as a projection.

The fastest way to fake a good ROI is to leave costs out. A number built on rent minus mortgage will always look better than the property really performs.

• Vacancy: budget for the weeks a unit sits empty between tenants.
• Repairs and capital items: roofs, heaters, and appliances that fail on their own schedule.
• Turnover: cleaning, paint, and listing costs at every move-out.
• Management and reserves: your time plus a cushion for surprises.

Include every recurring cost, then measure ROI on what lands in your account, not a best-case scenario.

There is no single target that fits every market. A good ROI is one that beats the safer places you could park the same cash and pays you fairly for the work a rental takes.

Compare your rental's return to your other options, then to similar properties nearby. Also revisit ROI over time, since rent growth, refinancing, and paying down the loan all shift the number. A deal that looked flat at purchase can improve as rents rise and the balance falls.