How to calculate return on rental property

Real estate can be an exciting venture, regardless of whether you’re buying your first rental property or adding to a growing portfolio. But without a clear understanding of return on investment, it’s hard to determine how profitable a rental property really is. Learning how to calculate real estate ROI will help you make better investment decisions and avoid costly surprises down the road.

What is return on rental, and why does it matter?

Return on rental, also known as return on investment or ROI, measures how much profit you’re earning from a rental property compared to how much you’ve invested in it. In other words, it tells you whether the property is making you money and if it's worth the effort and cost of owning it.

For example, if you invest $100,000 in a rental property, including the down payment, closing costs, and repairs, and the property earns $9,000 a year in profit after expenses, your ROI would be 9%. That means you're earning 9% back on the money you’ve invested, which gives you a concrete way to judge the property's performance.

Knowing your ROI helps you make better decisions, like whether a property is worth buying in the first place or recognizing when it’s underperforming. It also can help you determine your risk tolerance and how to grow your rental income over time.

Let’s say you’re comparing two properties, and one brings in a 5% return each year, while the other earns 9%. The up-front investment is the same for both properties. By choosing the property with the higher ROI, you’ll likely earn more money and grow your equity faster. Of course, there are other factors to consider when comparing rental properties, but understanding ROI can help you determine which opportunities are worth pursuing in the first place. 

How to calculate ROI on a rental property

To calculate ROI for a rental property, divide the annual profit by the amount of money invested, then multiply that number by 100. The formula looks like this: 

ROI = (Annual Return / Total Investment) × 100

For example, if you buy a rental property for $150,000 and pay an additional $10,000 in closing costs and repairs, your total investment is $160,000. If you earn $18,000 in rent each year and spend $6,000 on expenses, your profit is $12,000, giving you an ROI of 7.5%. 

Now, let’s say you finance the property instead. You put $30,000 down, spend $10,000 on up-front costs, and take out a loan for the rest, bringing your total out-of-pocket investment to $40,000. If your mortgage payments are $7,200 per year, your profit drops to $4,800, but your ROI increases to 12% because you used less of your own money. 

While ROI is a reliable tool for measuring your overall returns, other factors to consider include:

• The capitalization rate, which tells you how much income a property generates based on its price, without factoring in financing. 
• The cash-on-cash return, which looks at the actual cash invested and is especially helpful when comparing financed properties. 
• The gross rent multiplier, or GRM, which helps you compare rental properties by dividing the property price by the annual rent. GRM doesn’t account for expenses, so it’s best as a rough screening tool. 

Each of these metrics gives you different insights into whether a property is a good investment. Using them together can help you make better decisions.

Factors that influence rental property ROI

Many variables affect the profit you earn on a rental property. Here are some of the most important factors to keep in mind.

Property taxes

Higher property taxes can eat into your annual profits and lower your ROI, especially if they increase unexpectedly. On the flip side, buying in an area with relatively low property taxes can help you keep more of your rental income.

Maintenance and repairs

Older properties or homes with hidden issues may require frequent or costly repairs. Routine upkeep is unavoidable, but choosing a well-maintained property upfront – or budgeting for future repairs – can help preserve your ROI.

Vacancy rate

Every month your property sits empty is a month you’re not collecting rent. A high vacancy rate, whether due to location, pricing, or tenant issues, can drastically reduce your annual return. To protect your ROI, it's important to research local demand and price your rental competitively.

Financing method

How you pay for the property matters. A cash purchase typically results in a lower ROI because your investment is larger, but it comes with less risk. Financing can boost your ROI by lowering the amount of your own money involved, but high interest rates or poor loan terms can eat into your profits.

Property management fees

Hiring a property manager can save you time and reduce stress, especially if you own multiple rentals or live far away. But management fees – typically between 8% and 12% of the monthly rent – cut into your income and can reduce your overall ROI.

Rent price and annual increases

Charging too little rent limits your return, while raising rent too aggressively may lead to vacancies. Striking the right balance and staying current with market trends can help you maintain a strong ROI without driving away tenants.

In short, ROI isn’t set in stone. It depends on how well you manage these variables over time. Keeping costs in check and maximizing rental income are key to getting the most from your investment.

What’s a good ROI on a rental property?

A good return on a rental property typically falls between 6% and 12%, but what counts as good can vary depending on where the property is located, the type of property, and your overall investment strategy.

In general, an ROI between 6% and 8% is considered solid for long-term, lower-risk investments. These types of properties tend to be in stable neighborhoods with reliable tenant demand and predictable expenses. 

On the higher end, an ROI of 8% to 12% or more is often seen as strong and may be found in markets with more risk or properties that were purchased below market value. Anything below 6% might raise red flags – but that doesn’t always mean the property is a bad investment. If the home is in a rapidly appreciating area or offers other financial benefits, a lower ROI may still be worth it.

Location plays a major role in shaping what kind of return you can expect. High-demand urban areas might offer lower upfront ROI but better long-term appreciation and fewer vacancies. Meanwhile, smaller cities or up-and-coming neighborhoods may provide higher returns with more volatility.

The type of property also matters. Single-family homes, duplexes, condos, and multifamily buildings each come with different rent potential, maintenance costs, and management needs.

Your investment strategy will also influence your definition of a good ROI. If your main goal is a steady monthly income, then a higher ROI may be your top priority. But if you’re focused on long-term gains, such as building equity or benefiting from rising property values, you might be OK with a lower return in the short term. In the end, the best ROI is one that aligns with your financial goals and how involved you want to be in managing the property.

Strategies to maximize ROI

If you want to improve your return on a real estate investment, minor adjustments can make a big difference over time.

• Reduce operating costs: Review your expenses regularly and look for areas where you can cut back without compromising the quality of the property. For example, you might switch to energy-efficient appliances, negotiate better rates with service providers, or handle minor maintenance tasks yourself if you're local.
• Raise rent responsibly: Increasing rent can improve ROI, but it’s important to stay competitive with the local market. A modest, regular increase paired with strong property upkeep and good tenant communication can grow income without driving tenants away.
• Refinance to lower your interest rate: If interest rates drop, refinancing can reduce your monthly payment and increase your profits. Just make sure to factor in any refinancing fees when calculating your potential savings.
• Avoid long vacancies: Every month without tenants cuts directly into your income. You can minimize turnover by keeping good tenants happy, responding promptly to maintenance requests, and marketing the property early when a lease is ending.
• Manage the property efficiently: If you’re using a property management company, compare rates and services to ensure you’re getting value. If you’re managing it yourself, stay organized with tools that simplify rent collection, maintenance tracking, and communication.
• Stay on top of maintenance: Proactive maintenance can prevent minor issues from becoming expensive repairs. Well-maintained properties also tend to attract and retain better tenants, which means fewer vacancies and more consistent income.

By keeping expenses low, income steady, and your property in good shape, you’ll improve your rental’s performance and make the most of your investment.

FAQ

Here are answers to common questions about ROI on rental properties.

What is the difference between ROI and cap rate?

Cap rate is a quick way to estimate a property’s potential returns based on its net operating income and purchase price. It doesn’t factor in how you financed the property or what you paid out of pocket. ROI is more comprehensive. It accounts for your investment, including the down payment, loan terms, and closing costs, to show how your money is performing.

Can I calculate ROI before buying a property? 

Yes. You can estimate projected ROI by researching local rent prices, estimating monthly expenses, and calculating how much you’ll need to invest up front. If you're financing the purchase, be sure to include your expected mortgage payments. This gives you a rough idea of how profitable the property might be. Just keep in mind that these are projections, and actual numbers may change.

Does rental ROI include appreciation? 

Not necessarily. ROI calculations typically focus on annual cash flow, especially in the short term. However, appreciation plays a big role in your total return. While it’s not included in basic ROI formulas, it’s an important part of long-term wealth-building through real estate.

Is a high ROI always better?

Not necessarily. A higher ROI might seem attractive, but it can come with more risk. For example, a property in a declining neighborhood or with frequent tenant turnover may offer a high return on paper but cause more headaches in practice. It’s a good idea to balance ROI with other factors like location, property condition, tenant quality, and their long-term goals. Sometimes, a slightly lower ROI in a stable area may lead to better results over time.

The bottom line: Real estate ROI is important to factor into investment decisions

Understanding ROI is one of the most valuable tools in a real estate investor’s toolkit. It helps you measure the performance of a rental property, compare opportunities, and make good decisions about where to put your money. Whether you're buying your first rental or expanding your portfolio, knowing how to calculate and improve ROI can help you avoid costly mistakes and stay focused on your long-term goals.

At the end of the day, real estate investing is as much about planning as it is about the numbers. The more informed you are, the better equipped you’ll be to make decisions that support your financial goals.