Rental Property ROI Calculator

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Rental Property ROI is a metric used to show how profitable an investment property is. If you are thinking about investing in a rental property, you will want to know the expected return on the investment and how it compares to other rental properties on the market or investment opportunities. The calculator below allows you to change up the numbers according to your specific situation and see what return you can expect.

Did you purchase the property using a mortgage?
Mortgage Information
Renting Information
Avg. Vacant Months in a Year
Rental Property ROI8.52%
Annual Cash Flow
Year 1:- $27,445
Year 2+:$2,555
Monthly Avg. Expenses
Monthly Income

What You Should Know

  • The ROI of a rental property shows how profitable an investment property is based on its initial cost and the money you make while holding the property
  • Rental income, operating expenses and financing expenses need to be included when calculating the ROI of a rental property
  • An ROI between 6% and 8% is considered good, however investors aim for a return of 10% to 12%
  • The Cap Rate is a profitability measure that assumes that a rental property is purchased using cash only
  • IRR is a more accurate measure of the return of an investment because it takes into account the timing of the returns
  • Other forms of investing in real estate include house flipping, REITs and REIGs

Rental Property Investments

Investing in rental properties means purchasing a property through cash or by using a mortgage, and then leasing this property to other people. You invest by paying to purchase the property or its initial down payment, and by keeping the property in a good condition and profit from the investment returns which are in the form of monthly rent and the final return of selling the property.

Rental properties are an attractive investment opportunity for investors who prefer passive steady income instead of buying and selling properties constantly at different prices to make a profit. Rental properties also give investors more flexibility in choosing when to sell their investments. Since they keep generating cash flows, an investor does not have to rush but can rather wait until the time is right.

However, rental properties come with a lot of responsibilities, especially if you choose to manage them yourself, instead of paying for a property management company.

Rental Property ROI

To have an idea of what your investment in a rental property will return you will need to calculate the investment’s ROI and compare it with other investment opportunities in order to determine the most profitable one. The formula for calculating ROI on a rental property is:

Return on Investment Formula
Rental Property ROI =
Total Income - Operating Expenses - Financing Expenses
Cost of Investment
Annualized ROI =
[ (1 + Rental Property ROI) 1 / Investment Length ] -1


The main source of income from rental properties is the rent paid by tenants. Depending on the type of property you have purchased, whether it is a house, an apartment complex, or a shopping plaza, there can be other income involved such as offering different building amenities for a price.

To reflect a fairer expected income from a property, you have to also take into account the months when the property might be vacant, as well as credit losses. A property can be vacant when you are in the process of finding a new tenant after the old ones leave. Usually, a vacancy rate is used to account for this loss of income when calculating the ROI on a rental property. Credit losses, on the other hand, are incurred when tenants occupy the property but do not pay rent. In this case, there can be other expenses involved in evicting the tenant.

Total Income = Rental Income + Other Income - Vacancy and Credit Losses

Operating Expenses

Operating Expenses include the costs involved in the daily operation of the property. Operating expenses will need to be subtracted from the total income when calculating the net income the property generates. These include:

  • Property Maintenance
  • Repairs
  • Utilities
  • Property Taxes
  • Property Insurance
  • Management Fees

There are a lot of responsibilities involved with being a landlord, which mainly include managing the tenants, maintaining the property, and do the administrative work behind it. Many investors choose to hire property management companies to handle these areas and pay a fee for their services. The fee is included under management fees on operating expenses.

It is also worth mentioning that if the repairs are large enough to affect the value of a property, they will be considered as a capital expenditure and not an operating expense. In this case, the repairs would be added to the cost of the investment on the rental property ROI formula.

Financing Expenses

If you choose to purchase your rental property through a mortgage, you will have to make a down payment and pay monthly mortgage payments including the principal and interest. These costs need to be included when calculating ROI.

The down payment is the cost of investment in the rental property ROI formula, while mortgage payments are included under financing expenses. This means that the mortgage you choose will affect the annualized ROI of your rental property. For example, since 15-year mortgages are expected to have higher mortgage payments than 30-year mortgages, the ROI for the 15 years would be smaller compared to the 30-year mortgage, since you would be paying more in financing expenses.

Imagine that you have purchased a rental property costing $150,000 through a 30-year mortgage at 3% interest rate. You have made a down payment of 20% and your closing costs have come up to a total of $8,000. Before being able to rent it out, you also notice that the electrical system needs to be repaired, which will cost you another $3,000.

You have decided on a monthly rent of $1,500 and you expect the property to stay vacant 1 month of the year. Maintenance, insurance, utilities, and property taxes will cost you $350 every month.

Step 1: Find Total Income
Total Income= 12 * Monthly Rent - Vacancy Losses= 12* $1,500 - 1* 1,500= $16,500
Step 2: Find Total Operating Expenses
( Property taxes + Property insurance + Maintenance + Utilities ) * 12Total Operating Expenses= 12 * (Maintenance + Property Insurance + Utilities + Property taxes)= 12 * $350= $4,200
Step 3: Find Total Financing Expenses
Total Financing Expenses= 12 * Mortgage Payments= 12 * $506= $6,072
Step 4: Find the cost of investment
Cost of Investment= Down Payment + Closing costs + Major Repairs= 20% * $150,000 + $8,000 + $3,000= $30,000 + $11,000= $41,000
Step 5: Find ROI
Rental Property ROI = [ (Total Income - Operating Expenses - Financing Expenses)/ Cost of Investment)] * 100= [(($16, 500 - $4, 200 - $6, 072) / $41, 000)] * 100= 15.19%

The Return on Investment of the rental property will be 15.19%.

What is a good ROI in real estate?

If you finance the purchase of your rental property through a mortgage, an ROI of 6%-8% is usually considered good. However, investors aim for a higher ROI of 10% to 12% to target more profitable investments. Most real estate experts agree that an ROI of 12% on a rental property is a great ROI.

IRR vs ROI in Real Estate

The Internal Rate of Return or IRR is the discount rate that makes the Net Present Value of an investment equal to 0. The net present value is all the cash inflows an investment generates minus the cash outflows brought to the present. So, for example, if an investment will generate a net cash flow of $3,000 in 2 years, we need to discount it by a factor to find what the value of this cash flow is now. Hence called the Net Present Value.

Internal Rate of Return Formula
0 = NPV =
- C0
Ct = Cash Inflow
T = Time Periods
C0 = Initial Investment
NVP = Net Present Value

IRR measures what discount factor makes the Net Present Value of an investment 0. In the case of rental properties, the cash flows would be the monthly rent, operating expenses, financing expenses, the cost of the investment, and any other cash flows involved. The higher the IRR, the better. RR has an advantage towards ROI because it takes into account the timing of the cash flows. However, it is more complex to calculate. You would either need to do the trial-and-error method to figure out the IRR of an investment or use computer software.

You purchase a rental property paying $150,000 in cash. You charge a rent of $1,000 per month and incur operating expenses of $300 every month. In 5 years, you sell the rental property for $180,000.

Yearly Cash Flow
= 12 * Monthly Rent - 12 * Operating Expenses= 12 * $1,000 - 12 * $300= $8,400
Initial Investment = $150,000
Cash Inflow Year 1 - 4 = Net Income = $8,400
Cash Flow Year 5
= Cash Inflow from Sale + Net Income= $180,000 + $8,400= $188,400
= 0

Cap Rate vs ROI

The cap rate is a popular tool to measure the profitability of rental properties. The capitalization rate always assumes that the rental property is purchased using cash only, while ROI takes into account the case when we finance the property through a mortgage. Therefore, the financing expenses of principal and interest payments are excluded from the Cap Rate calculation.

Cap Rate = Net Operating Income/ Property Cost or Market Value

Real Estate Investing

If you want to invest in the real estate industry, there are other ways for you to do so besides purchasing a rental property.

House Flipping - This is the term used when investors purchase properties they believe to be undervalued and sell them later at a higher price. This requires a lot of capital and knowledge about the real estate market. Some investors renovate and repair the properties before selling them to increase the property’s value and hopefully make a higher profit. However, pure house flippers usually don’t make any changes to the property.

REITs - Real Estate Investment Trusts pool investors’ money to purchase and operate income properties. REITs trade on exchanges and are perfect for investors who want to diversify their portfolio to include the real estate industry but do not want to take part in a real estate transaction. There are different types of REITs, some of which actually own buildings and others that provide financing for real estate.

REIGs - Real Estate Investment Groups are similar to mutual funds that invest in rental properties. The group builds sets of apartment blocks, which it then sells to interested investors. By purchasing one of the properties, investors join the group. Usually, when you purchase a rental property through an REIG, the company handles most of the management and administrative tasks in exchange for a portion of your monthly rent.
