What Is Rental Property ROI?

Why ROI Matters for Landlords

You did not buy rental property to break even. You bought it to make money. But how do you know if you are actually making money? And how do you know if you are making enough?

That is what ROI answers. It takes all the complexity of rental property ownership (rent collected, expenses paid, mortgage service, vacancy losses, appreciation, tax benefits) and boils it down to one number: the percentage return on your invested dollars.

Without calculating ROI, you might think you are doing great because rent checks come in every month. But after accounting for all expenses, mortgage, taxes, insurance, maintenance, and vacancy, that "great" property might only be returning 3% on your money. You could earn more in a savings account with zero headaches.

Alternatively, you might think your property is barely worth the trouble, but when you factor in appreciation, mortgage paydown, and tax benefits, your total return is 18%. Knowing the real number helps you make better decisions about buying, selling, and improving your portfolio.

Three Ways to Calculate ROI

1. Cash-on-Cash Return

The most popular metric for active landlords. It tells you: for every dollar I have invested, how many cents per year am I getting back in cash?

Formula: Annual Pre-Tax Cash Flow ÷ Total Cash Invested × 100

2. Cap Rate

A property-level metric that ignores financing. It tells you: what is this property returning based on its purchase price, regardless of how I financed it?

Formula: Net Operating Income ÷ Property Value × 100

3. Total ROI (Comprehensive Return)

The most complete picture. Includes cash flow, appreciation, mortgage principal paydown, and tax benefits.

Formula: (Cash Flow + Appreciation + Principal Paydown + Tax Savings) ÷ Total Cash Invested × 100

Real Example: Calculating ROI Three Ways

Property: Duplex purchased for $300,000. Down payment: $60,000 (20%). Closing costs: $8,000. Total cash invested: $68,000. Mortgage: $240,000 at 7% for 30 years = $1,597/month ($19,164/year). Gross rent: $2,800/month ($33,600/year). Operating expenses: $10,800/year (taxes, insurance, maintenance, vacancy). NOI: $33,600 - $10,800 = $22,800/year. Cash flow after mortgage: $22,800 - $19,164 = $3,636/year.

Cash-on-Cash Return: $3,636 ÷ $68,000 = 5.3%. Decent but not spectacular. This tells you the property is cash flowing, but modestly relative to your investment.

Cap Rate: $22,800 ÷ $300,000 = 7.6%. Good cap rate for most markets. This tells you the property itself is performing well regardless of your financing.

Total ROI: Cash flow: $3,636. First-year principal paydown: roughly $2,400 (builds equity you will recover when you sell or refinance). Estimated appreciation at 3%: $9,000. Tax benefits (depreciation, expense deductions): estimated $2,500 in tax savings. Total return: $3,636 + $2,400 + $9,000 + $2,500 = $17,536. Total ROI: $17,536 ÷ $68,000 = 25.8%. Now that is a compelling return.

How to Improve Your ROI

Increase rent. Annual rent increases of 3-5% compound over time. A $50/month increase on one unit is $600/year going straight to your bottom line with no additional cost.

Reduce vacancy. Every month a unit sits empty costs you $1,400 in this example. Focusing on tenant retention and fast turnovers keeps vacancy low and income high.

Control expenses. Shop insurance annually. Do preventive maintenance to avoid expensive emergency repairs. Self-manage to save 8-12% in PM fees.

Refinance when rates drop. Lowering your interest rate by 1% on a $240,000 loan saves roughly $2,400/year in debt service. That goes straight to cash flow and improves your cash-on-cash return.

Add value. Renovations that allow rent increases can boost ROI significantly. Spending $15,000 on a kitchen upgrade that allows a $200/month rent increase returns $2,400/year, or 16% on the renovation investment.

Common Mistakes

Only looking at cash flow. Cash flow is the most visible return, but it is often the smallest component of total ROI. Appreciation and mortgage paydown typically contribute more over time. Do not sell a property because cash flow is thin if your total return is strong.

Ignoring vacancy in calculations. Using 100% occupancy in your ROI calculation is fantasy math. Use realistic vacancy assumptions (5-8% in most markets) to get an honest number.

Forgetting CapEx. Your cash flow looks great until the roof needs replacing. Factor in CapEx reserves when calculating true ROI.

Comparing properties using different metrics. Cash-on-cash, cap rate, and total ROI will give different numbers for the same property. When comparing properties, use the same metric for both.

Frequently Asked Questions

What is a good ROI for a rental property?

Cash-on-cash return of 8-12% is generally considered good. Total ROI of 15-25% (including all return components) is excellent. These numbers vary by market, property type, and risk level. Higher-risk properties (older buildings, rougher areas) should command higher returns.

Should I include appreciation in my ROI calculation?

For prospective analysis (deciding whether to buy), use conservative appreciation estimates or none at all. Appreciation is not guaranteed. For retrospective analysis (how did this investment perform), include actual appreciation since it is a real return you have earned.

How do I track ROI over time?

Update your ROI calculation annually. Recalculate with current rent, current expenses, current property value (estimated), and current mortgage balance. Track this in your spreadsheet alongside your rent roll and financial data. Over time, you build a clear picture of performance trends.