🏠 Thinking about buying a rental property or already have one and wondering how good the investment is? That’s where ROI (Return on Investment) comes in!
ROI helps you understand how profitable your rental property really is — in simple percentage terms.
Let’s break it down together with examples, a calculator, and a visual cheat sheet!
Table of Contents
🙋♀️ What is ROI in Real Estate?
ROI (Return on Investment) is a way of measuring how much profit you’re making compared to how much money you’ve invested.
The higher the ROI, the better your property is performing as an investment!
🧮 ROI Formula for Rental Property
Here’s the simple formula:
ROI = (Annual Net Profit / Total Investment) × 100
Where:
- Annual Net Profit = Rental Income – Expenses (like taxes, insurance, maintenance, etc.)
- Total Investment = Down Payment + Closing Costs + Renovations
🏡 Example
Let’s say you:
- Put down $50,000
- Spent $5,000 on closing and repairs
- Collect $18,000/year in rent
- Spend $6,000/year on expenses
📌 Annual Net Profit = $18,000 – $6,000 = $12,000
📌 Total Investment = $50,000 + $5,000 = $55,000
ROI = (12,000 / 55,000) × 100 = 21.82%
So, you’re earning 21.82% per year on your investment. 🙌
✨ Final Tips
- ROI doesn’t include mortgage payments unless you're calculating cash-on-cash return
- Include ALL costs (like management fees or repairs)
- ROI is helpful, but always pair it with other tools like cap rate or cash flow analysis for deeper insights
📌 Notes
Mortgage payments aren’t included in ROI because they involve:
- Principal, which builds equity (not an expense)
- Interest, which is a cost of borrowing (not part of the asset’s performance)
So the basic ROI tells you:
“How much return am I earning on my own money, regardless of the loan?”