How to Calculate ROI on a Rental Property: A Simple Guide

Understanding your return on investment (ROI) is crucial when buying rental property. Here’s how to figure it out without complicated math.

What ROI Means for Rental Properties

ROI shows how much profit you make compared to what you spend. It helps answer: “Is this property worth buying?”

Two Ways to Look at ROI

1. Yearly Cash Flow ROI – Your annual profit from rent
2. Long-Term Total ROI – Includes property value growth and mortgage paydown

What Costs to Consider

Upfront Money You Spend

• Property purchase price
• Loan fees and closing costs
• Repairs before renting

Ongoing Expenses

• Mortgage payments
• Property taxes and insurance
• Maintenance and repairs
• Property management fees
• Budget for empty months

Money Coming In

• Monthly rent payments
• Extra income like parking or laundry fees

Calculating Yearly Cash Flow ROI

1. Multiply monthly rent by 12 to get yearly income
2. Add up all yearly expenses
3. Subtract expenses from income to get profit
4. Divide profit by your total initial investment
5. Multiply by 100 to get percentage

A good yearly ROI is typically 8% or higher.

Calculating Long-Term Total ROI

This includes:

• All rent collected over years
• Property value increase (appreciation)
• Mortgage principal you’ve paid down
• Subtract all expenses over time

This gives you the bigger picture of your total return.

Smart Ways to Improve ROI

• Set the right rent price – Check what similar properties charge
• Keep tenants longer – Fewer empty months means more income
• Control costs – Regular maintenance prevents big repairs
• Use tax benefits – Deduct mortgage interest and other expenses
• Refinance if rates drop – Could lower your payments

Final Thoughts

Calculating ROI on a rental property is a smart way to know if your investment is working for you. It may seem like a lot of math, but it’s actually pretty simple once you know the steps. Just remember to track all your income, expenses, and upfront costs.

A good ROI can mean strong monthly cash flow and long-term financial growth. So before you invest, run the numbers—and invest wisely!

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