How to Calculate Rental Property ROI

How do you know if a rental is actually making you money? The answer is one simple number: rental property ROI. It takes the cash a property earns in a year and compares it to the money you put in. Written as a percent, ROI tells you how hard each dollar you invested is working. This guide shows the formula, walks through two worked examples, and keeps every number illustrative.

What Is Rental Property ROI?

ROI stands for return on investment. It is the big-picture score for a rental deal. It answers one plain question: for every dollar you put in, how much did you get back in a year?

ROI is shown as a percent, so you can compare very different deals on the same scale. A cheap condo and an expensive duplex can both be judged by their ROI. A higher percent means your money worked harder that year.

Because it rolls the whole deal into one figure, ROI is the metric most investors start with. It is broad by design, so treat it as a first read rather than the final word on a property.

The Rental Property ROI Formula

The core formula is short and easy to remember. You only need two inputs: your annual return and your total invested.

Your annual return is the profit the property gives you in a year. Your total invested is all the cash you tied up to own it. Divide the first by the second, multiply by 100, and you have ROI as a percent.

How to Calculate ROI Step by Step

You can work out ROI in four clear steps. The same steps work whether you pay cash or use a loan.

1. Add up your yearly rent income.
2. Subtract all yearly costs to get your annual return.
3. Add up every dollar you invested to buy the property.
4. Divide the annual return by the total invested, then multiply by 100.

All-Cash ROI: A Worked Example

Start with the simplest case. You buy a rental outright with cash, so no loan is involved. Here the total invested is close to the full purchase price.

Say you pay $200,000 in cash for a small rental. After a year, your rent income minus all costs leaves you with a $14,000 annual return. Plug those into the formula.

ROI = ($14,000 / $200,000) x 100 = 7%. So this all-cash deal returns 7% in its first year. Every dollar you invested earned you 7 cents that year.

This version is clean because the money invested is easy to see. It is the whole price you paid, plus any closing and repair costs.

Financed ROI: A Worked Example

Most investors do not pay all cash. They use a mortgage, so they tie up far less of their own money. With financing, your total invested is the cash you actually spent, not the full price.

For a financed deal, total invested usually means your down payment plus closing costs plus any upfront rehab. Say all of that adds up to $50,000. After paying the mortgage and every other cost, your annual cash return is $5,000.

ROI = ($5,000 / $50,000) x 100 = 10%. The financed deal shows a 10% return, higher than the all-cash 7%, because you controlled the same property with less of your own cash. The table below lines up both examples.

Financing can lift ROI because the return is spread over less invested cash. It also adds loan payments and risk, so a higher percent is not automatically a safer deal.

What Counts as Your Annual Return?

Your annual return is the yearly profit, not the rent you collect. Start with the rent, then subtract the costs of owning and running the property.

Common costs include property taxes, insurance, repairs, maintenance, property management, and vacancy. For a financed deal, you also subtract the mortgage payments. What is left is your annual return.

Some investors keep it to cash profit only. Others also count principal paydown, the part of each loan payment that builds equity, and sometimes appreciation. You can include those if you want a fuller picture, but keep it simple and consistent so your ROI stays easy to read.

How Purchase Price Changes Your ROI

ROI is sensitive to what you pay. When the annual return stays the same, a higher purchase price means a lower ROI. The chart below shows the same $14,000 all-cash return at four different prices.

The lesson is simple: price matters as much as rent. Paying less for the same income stream raises your ROI, which is why disciplined buyers watch the purchase price closely.

ROI vs Other Rental Metrics

ROI is the big-picture number, but it is not the only one. Investors often pair it with more focused metrics, each of which has its own guide. Use ROI as your starting read, then dig deeper with these:

• Cap Rate Explained for Real Estate Investors covers a price-to-income ratio that ignores financing.
• Cash-on-Cash Return Explained focuses only on the cash you put in versus cash you get back.
• How to Analyze a Rental Property Deal walks through a full deal review using several metrics together.

You will also hear about the 1% rule, rental yield, and gross rent multiplier. Those are separate screening tools, so lean on the guides above rather than mixing them into your ROI math.

Frequently Asked Questions About Rental Property ROI

Sources

This article is for general education only, not financial or investment advice. Real estate returns depend on price, rent, costs, financing, and local market conditions that vary and change, so run your own numbers and consult a professional. Reviewed for accuracy by Prof. Dr. Khalil Mudassar, PhD. Last updated September 12, 2026.