Transparent method
The formula
Worked example
Example inputs
How to interpret the result
Total rental return comes from three genuinely different sources, actual cash flow received, principal paydown building equity, and price appreciation, and only the first two are realized in a way that's certain by holding the property. Appreciation is an assumption about the future, not a return that's actually locked in the way collected cash flow and paid-down principal are.
Before you rely on it
What to check
Separate the realized components, cash flow and principal paydown, from the assumed appreciation component when evaluating whether a property's return actually justifies the investment.
The common error
Where people go wrong with rental property ROI calculator
Blending assumed future appreciation into a return figure and treating the combined number as equally certain as the realized cash-flow and principal-paydown components. Appreciation is a projection, not a return that's actually been earned yet.
Sensitivity evidence
How total cash invested changes the estimated total annual ROI
| Total cash invested | Estimated total annual ROI | Estimated annual wealth increase | Cash yield only |
|---|---|---|---|
| $80,000 | 32.5% | $26,000 | 11.3% |
| $90,000 | 28.9% | $26,000 | 10.0% |
| $100,000worked example | 26.0% | $26,000 | 9.0% |
| $110,000 | 23.6% | $26,000 | 8.2% |
| $120,000 | 21.7% | $26,000 | 7.5% |
Every input, tested
Which input moves the estimated total annual ROI most
| Input | Tested from | To | Estimated total annual ROI at each end | Swing |
|---|---|---|---|---|
| Total cash invested | $90,000 | $110,000 | 28.9% to 23.6% | 5.3% (20%) |
| Annual property appreciation | $10,800 | $13,200 | 24.8% to 27.2% | 2.4% (9.2%) |
| Annual cash flow | $8,100 | $9,900 | 25.1% to 26.9% | 1.8% (6.9%) |
| Annual principal paydown | $4,500 | $5,500 | 25.5% to 26.5% | 1.0% (3.8%) |
Two variables at once
Estimated total annual ROI by total cash invested and annual cash flow
| Total cash invested \ Annual cash flow | $7,200 | $9,000 | $10,800 |
|---|---|---|---|
| $80,000 | 30.3% | 32.5% | 34.8% |
| $90,000 | 26.9% | 28.9% | 30.9% |
| $100,000 | 24.2% | 26.0% | 27.8% |
| $110,000 | 22.0% | 23.6% | 25.3% |
| $120,000 | 20.2% | 21.7% | 23.2% |
Step by step
The worked example, input by input
| Input | Value used |
|---|---|
| Total cash invested | $100,000 |
| Annual cash flow | $9,000 |
| Annual principal paydown | $5,000 |
| Annual property appreciation | $12,000 |
| Estimated total annual ROI | 26.0% |
| Estimated annual wealth increase | $26,000 |
| Cash yield only | 9.0% |
Where the inputs come from
Total cash invested is your down payment, closing costs and initial repairs. Annual cash flow is after operating expenses and mortgage payments, annual principal paydown is the part of your mortgage payments that reduces the loan balance, from the amortization schedule, and annual appreciation is the increase in the property's value, which is an assumption. Use conservative appreciation, since it is not guaranteed and can be negative.
Using the estimated total annual ROI in a real decision
Look at how much of the return depends on it.
When the result stops applying
It is a one-year snapshot and does not include selling costs, taxes, capital expenditures and the time value of money. Appreciation cannot be spent without selling or refinancing. Borrowing magnifies the return in good times and losses in bad ones. Tax benefits such as depreciation are not in the figure.
What to compare it with
Compare the cash-only piece on the cash-on-cash calculator, and the yield on price on the cap rate page. The rental property depreciation calculator estimates the tax deduction, and the rental cash flow page gives the monthly picture. Run a case with zero appreciation to test the downside.
People also ask
Frequently asked questions
What are the four ways real estate returns money?
Cash flow, principal paydown, appreciation and tax benefits such as depreciation. This calculator counts the first three.
Should I count appreciation in ROI?
It is part of the total return, but treat it as uncertain. A plan that only works with high appreciation is riskier than one that pays through cash flow.
Why is ROI higher than cash-on-cash?
Because ROI adds the equity from mortgage paydown and the gain in property value to the cash flow, while cash-on-cash counts only cash flow.