How to Calculate ROI on Your Rental Property: Every Formula You Need (2026)

By PropsManager Team · Rent & Finance · Feb 24, 2026

Revenue is vanity, profit is sanity, and ROI is clarity.

Too many landlords measure their rental property's success by how much rent comes in each month without understanding whether their investment is actually performing well. A property that generates $2,000/month in rent might be a phenomenal investment — or a terrible one — depending on how much you put in, how much you spend, and what return you are actually earning on your capital.

Until you calculate your actual Return on Investment, you are guessing. And guessing is not a strategy.

This guide walks you through every major ROI metric for rental properties, when to use each one, how to calculate them accurately, and what the numbers should look like for a healthy investment.

Why ROI Matters for Rental Property Investors

Comparing Investments

If your rental property earns a 6% return and the stock market averages 10%, you need to understand why you are in real estate. (There may be great reasons — tax advantages, appreciation, leverage — but you need to know the numbers.) ROI lets you compare your property against other investments on an apples-to-apples basis.

Evaluating New Acquisitions

Before buying a new property, running ROI calculations tells you whether the deal makes financial sense at the asking price and projected rent. If the numbers do not work, either negotiate a better price or walk away.

Identifying Underperforming Properties

If you own multiple properties, ROI analysis reveals which ones are carrying the portfolio and which are dragging it down. This informs decisions about rent increases, improvements, or selling.

Making Improvement Decisions

Should you spend $15,000 on a kitchen renovation? ROI analysis tells you whether the resulting rent increase justifies the expense over your holding period.

The Building Blocks: Income and Expenses

Before calculating any ROI metric, you need accurate income and expense numbers. Getting these wrong makes every subsequent calculation meaningless.

Gross Rental Income

This is the total rent you would collect if the property were occupied 100% of the time, at the stated rental rate, for the full year.

$$ \text{Gross Rental Income} = \text{Monthly Rent} \times 12 $$

If you charge $1,800/month, your gross rental income is $21,600/year.

Other Income

Many rental properties generate income beyond base rent:

• Pet rent — $25–$50/month per pet
• Parking fees — $50–$200/month per space
• Laundry income — $50–$150/month (coin-operated or card machines)
• Storage rental — $25–$100/month per unit
• Late fees — variable (not something to plan for, but it is income)
• Application fees — not recurring, but contributes to total revenue

$$ \text{Gross Potential Income} = \text{Gross Rental Income} + \text{Other Income} $$

Vacancy and Credit Loss

No property is occupied 100% of the time. You need to account for vacancy periods between tenants and for the occasional tenant who defaults on rent.

A standard vacancy rate assumption is 5–8% of gross rental income, depending on your market. If your area has very low vacancy (below 3%), you might use a lower figure — but using at least 5% prevents you from overestimating future income.

$$ \text{Effective Gross Income} = \text{Gross Potential Income} \times (1 - \text{Vacancy Rate}) $$

Example: $22,200 gross potential income × (1 - 0.05) = $21,090 effective gross income

Operating Expenses

These are all the costs of owning and operating the property except mortgage payments (the debt service). ROI metrics intentionally separate operating costs from financing costs because they serve different analytical purposes.

Common operating expenses include:

The 50% Rule (Quick Estimate): A common rule of thumb is that operating expenses will consume approximately 50% of your gross rental income over the long term. This is a rough estimate — your actual number may be higher or lower — but it is useful for quick back-of-envelope calculations.

$$ \text{Estimated Operating Expenses} \approx \text{Gross Rental Income} \times 0.50 $$

For accurate analysis, always use your actual expense numbers from your records. If you are using PropsManager to track expenses, you can pull these numbers directly from your dashboard.

Metric 1: Net Operating Income (NOI)

NOI is the most fundamental metric in real estate investing. It tells you how much income the property generates after all operating expenses, but before debt service and income taxes.

$$ \text{NOI} = \text{Effective Gross Income} - \text{Operating Expenses} $$

Example

Why NOI Matters

NOI strips out financing — which varies based on your down payment, interest rate, and loan term — to show you the property's intrinsic earning power. Two investors can buy the same property with different financing structures and have different cash flows, but the NOI is the same. This makes NOI the standard metric for comparing properties.

Metric 2: Cap Rate (Capitalization Rate)

Cap rate tells you the rate of return you would earn if you purchased a property entirely with cash (no mortgage). It is the standard way investors and appraisers compare the relative value of investment properties.

$$ \text{Cap Rate} = \frac{\text{NOI}}{\text{Current Market Value (or Purchase Price)}} \times 100 $$

Example

Using the NOI calculated above:

$$ \text{Cap Rate} = \frac{$11,401}{$200,000} \times 100 = 5.7% $$

What Is a Good Cap Rate?

Important: A higher cap rate is not automatically better. Higher cap rates often correlate with higher risk, lower property appreciation, or worse neighborhoods. Lower cap rates in premium markets are offset by stronger appreciation and more stable tenancies.

When to Use Cap Rate

• Comparing two potential properties in the same market
• Assessing whether a property is fairly priced relative to its income
• Communicating value with other investors, lenders, or real estate professionals

When NOT to Use Cap Rate

• Comparing properties in very different markets (a 4% cap rate in San Francisco is not comparable to a 4% cap in Cleveland)
• Evaluating your personal return on investment (use cash-on-cash for that)
• Short-term analysis (cap rate is a snapshot, not a projection)

Metric 3: Cash-on-Cash Return

This is the metric that tells you the return on the actual cash you invested — the money you put out of pocket. For most investors who use mortgage financing, this is the most personally relevant ROI metric.

$$ \text{Cash-on-Cash Return} = \frac{\text{Annual Pre-Tax Cash Flow}}{\text{Total Cash Invested}} \times 100 $$

Calculating Annual Pre-Tax Cash Flow

Cash flow accounts for debt service (your mortgage payment), which NOI does not:

$$ \text{Annual Cash Flow} = \text{NOI} - \text{Annual Debt Service} $$

Example

$$ \text{Cash-on-Cash Return} = \frac{$2,821}{$50,000} \times 100 = 5.6% $$

What Is a Good Cash-on-Cash Return?

• Below 4% — underwhelming; consider whether the property is likely to appreciate significantly
• 4–8% — solid for stable markets with appreciation potential
• 8–12% — excellent; typical target for experienced investors
• 12%+ — exceptional; verify your assumptions are realistic

The Power of Leverage

Cash-on-cash return demonstrates why investors use mortgages rather than buying all-cash. With a mortgage, you control a $200,000 asset with only $50,000 of your own money. The property's income services the debt while you earn a return on a fraction of the total value.

However, leverage works both ways. If the property's NOI decreases (vacancy, unexpected expenses), your cash flow can turn negative — and you are still responsible for the mortgage.

Metric 4: Gross Rent Multiplier (GRM)

GRM is a quick-and-dirty metric for comparing investment properties. It tells you how many years of gross rent it would take to pay for the property.

$$ \text{GRM} = \frac{\text{Property Price}}{\text{Annual Gross Rental Income}} $$

Example

$$ \text{GRM} = \frac{$200,000}{$21,600} = 9.3 $$

What Is a Good GRM?

Limitations of GRM

GRM ignores expenses entirely. A property with a GRM of 8 might have enormous maintenance costs that wipe out the apparent advantage. Use GRM for quick screening, then run full NOI and cash-on-cash analysis before making decisions.

Metric 5: Total Return on Investment

The metrics above capture annual income returns, but they miss a critical component of real estate investing: equity building and appreciation. Total ROI accounts for all sources of return.

The Four Components of Rental Property Return

1. Cash flow — the net income you pocket each year (captured in cash-on-cash return)
2. Equity buildup through mortgage paydown — each mortgage payment reduces your loan balance, increasing your ownership stake
3. Property appreciation — the increase in the property's market value over time
4. Tax benefits — depreciation deductions, mortgage interest deductions, and other tax advantages that increase your effective return

Annualized Total Return Formula

$$ \text{Total ROI} = \frac{\text{Cash Flow} + \text{Equity Buildup} + \text{Appreciation} + \text{Tax Savings}}{\text{Total Cash Invested}} \times 100 $$

Extended Example

Let us calculate the total return for our example property in Year 1:

$$ \text{Total ROI} = \frac{$12,606}{$50,000} \times 100 = 25.2% $$

This is why real estate investors talk about "the four profit centers." The cash flow alone (5.6% cash-on-cash) is modest, but the total return (25.2%) is compelling when you account for all four components.

Caveat: Appreciation is not guaranteed, and tax laws change. Always be conservative with appreciation assumptions (2–3% in most markets) and consult a tax professional for your specific situation.

Metric 6: The 1% Rule and 2% Rule (Quick Screening)

These are not true ROI calculations — they are quick screening tools to decide whether a property is worth analyzing further.

The 1% Rule

Monthly rent should be at least 1% of the purchase price.

$$ \text{Rent} \geq \text{Purchase Price} \times 0.01 $$

A $200,000 property should rent for at least $2,000/month.

The 2% Rule

Monthly rent should be at least 2% of the purchase price. This is very difficult to achieve in most markets and usually indicates high-risk or low-cost areas.

Reality check: In most coastal and major metro markets, the 1% rule is hard to achieve. Use these rules to quickly filter out properties that are obvious losers, but do not reject a property solely because it fails the 1% rule — run the full ROI analysis.

How to Improve Your Rental Property ROI

If your numbers are not where you want them, here are actionable strategies:

Increase Income

• Raise rent to market rate — see our guide on how to set the right rent price
• Add income streams — pet rent, parking, storage, laundry
• Allow pets — expands your applicant pool and adds revenue via pet rent and deposits
• Reduce vacancy — better tenant screening leads to longer tenancies and fewer turnovers
• Improve the property — targeted renovations that justify higher rent (focus on kitchen, bathroom, and flooring)

Reduce Expenses

• Challenge your property tax assessment — many properties are over-assessed
• Shop insurance annually — rates vary significantly between providers
• Implement preventative maintenance — spending $200 to service an HVAC system prevents a $5,000 replacement
• Manage the property yourself — eliminates 8–12% management fees (but factor in your time)
• Use property management software — automates rent collection, maintenance tracking, and record-keeping at a fraction of the cost of a property manager
• Maximize tax deductions — ensure you are capturing every legitimate deduction

Optimize Financing

• Refinance at a lower rate — even a 0.5% reduction in interest rate can meaningfully improve cash flow
• Make extra principal payments — accelerates equity buildup and reduces total interest paid
• Consider a 15-year mortgage — higher monthly payments but faster equity buildup and less total interest

Common ROI Calculation Mistakes

Forgetting Vacancy

Assuming 100% occupancy inflates your income and makes bad deals look good. Always include a vacancy factor of at least 5%.

Ignoring CapEx

Roofs, HVAC systems, water heaters, and appliances do not last forever. If you are not reserving 5–10% of rent for capital expenditures, you will eventually face a major expense that wipes out years of cash flow.

Using the Wrong Property Value

For cap rate and total ROI calculations, use the current market value — not your original purchase price (unless you just bought the property). Your ROI should reflect the opportunity cost of your current equity.

Confusing Cash Flow with ROI

Positive cash flow does not automatically mean good ROI. A property that cash flows $200/month on a $100,000 investment is earning 2.4% cash-on-cash — likely worse than a savings account. Always calculate the return as a percentage of invested capital.

Not Tracking Actual Expenses

Estimated expenses are useful for analyzing a potential purchase, but once you own the property, track every actual dollar spent. Your real ROI may be significantly different from your projections. Using expense tracking software ensures accurate numbers.

Tracking ROI Over Time

Your ROI is not a static number. It changes every year as:

• Rent increases
• Expenses fluctuate
• Mortgage balance decreases
• Property value changes
• Tax laws evolve

Review your ROI annually for each property. This tells you which properties are improving, which are declining, and whether your money could be better deployed elsewhere (via a 1031 exchange or reinvestment).

PropsManager tracks your income and expenses in real time, making it easy to calculate your actual ROI at any point — not just when you do your taxes.

Explore More PropsManager Resources

Looking for the right property management software? Check out our in-depth guides:

• Compare Property Management Software — See how PropsManager stacks up against Buildium, AppFolio, Rent Manager, and Propertyware.
• Software for Small Landlords — Built for landlords managing 1–50 units without the enterprise price tag.
• AI-Powered Property Management — Discover how automation can save you 5–10 hours per week.
• Solutions for Property Managers — Scale from 50 to 500+ units without scaling your costs.

Frequently Asked Questions

What is a good overall ROI for a rental property?

A total ROI (including cash flow, equity buildup, appreciation, and tax benefits) of 10–15% is considered solid. Cash-on-cash return alone should target at least 6–10% in most markets. The "right" number depends on your risk tolerance, alternative investment options, and local market conditions.

Should I calculate ROI before or after taxes?

Both. Pre-tax ROI (using the formulas above) gives you a clean comparison between properties and against other investment types. After-tax ROI (factoring in depreciation, deductions, and your tax bracket) shows your actual net return. Consult a CPA for after-tax analysis.

How do I account for appreciation in ROI calculations?

Use conservative appreciation assumptions — typically 2–3% per year for most markets. Historical national averages run around 3–4%, but this varies dramatically by location and economic conditions. Never rely on appreciation alone to justify a property purchase.

Is cash flow or appreciation more important?

Cash flow provides immediate, tangible income and a margin of safety against downturns. Appreciation builds long-term wealth but is unpredictable. The best investments deliver both. If forced to choose, most experienced investors prioritize cash flow — you can sustain a property through a downturn if the cash flow covers expenses, but not if you are relying on appreciation that may not materialize.

How does leverage (a mortgage) affect ROI?

Leverage amplifies both gains and losses. In a positive scenario, using a mortgage dramatically increases your cash-on-cash return because you are earning income on the full property value while investing only a fraction in cash. In a negative scenario (vacancy, market decline), leverage increases your losses because the debt obligations remain fixed.

What ROI should I target for a new property purchase?

At minimum, look for a property that projects a 6%+ cash-on-cash return with conservative assumptions (5% vacancy, realistic expenses, current market rent). If the only way a deal works is with optimistic assumptions, it is probably not a good deal.

Conclusion

Knowing how to calculate ROI separates amateur landlords from serious investors. The formulas themselves are straightforward — the discipline is in using accurate numbers, tracking them consistently, and making decisions based on data rather than gut feelings.

Run the numbers before you buy. Track them while you own. And use them to decide when to hold, improve, or sell.

Ready to track your rental property performance with real data? Request a demo of PropsManager and see how our financial dashboard gives you real-time visibility into income, expenses, and returns across your entire portfolio.