How to Calculate ROI on a Rental Property
Rental real estate pays you in four ways at once. Most people only count one (cash flow) and undersell their actual return. Here's the full picture.
The 4 sources of return
1. Cash flow — rent minus all expenses and the mortgage. The money you pocket monthly. Measured cleanly by cash-on-cash return.
2. Appreciation — the property's value rising over time. Historically ~3–4%/yr nationally, but very market-dependent.
3. Loan paydown — your tenant pays down your mortgage. Every payment builds your equity, even with zero cash flow.
4. Tax benefits — depreciation and deductions can shelter income. (Talk to a CPA — not tax advice.)
The simple ROI formula
For a quick cash-only view, use cash-on-cash:
ROI ≈ (Annual Cash Flow ÷ Total Cash Invested) × 100
For total return, add your annual equity gain (appreciation + loan paydown) to cash flow, then divide by cash invested. That's why a property with modest cash flow can still be a great investment — three of the four returns are invisible on a monthly statement.
A realistic example
$60k invested, $4k/yr cash flow (6.7%), plus ~$6k/yr appreciation and ~$4k/yr loan paydown = $14k total return ≈ 23% total ROI. Cash flow alone told you 6.7%.
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