Investors

How do I calculate ROI on a rental property?

By Steve Lockhart

The short answer

Cash on cash return answers the question most investors are really asking: for every dollar I put in, what comes back each year?

Full answer

Cash on cash return answers the question most investors are really asking: for every dollar I put in, what comes back each year? Take your annual pre-tax cash flow, the rent left after every expense and mortgage payment for a year, and divide it by your total cash invested, the down payment plus closing costs plus any upfront repairs. If you put $80,000 in and the property cash flows $8,000 a year, your cash on cash return is 10 percent.

Total return gives the fuller picture. It combines cash flow, the principal your tenants pay down on the mortgage, and appreciation, minus the costs of eventually selling. A property can have modest cash flow and still build wealth steadily through paydown and appreciation, or strong cash flow in a flat market, and only the combined number tells you which kind of investment you actually own.

Both calculations only matter if the inputs are honest. Use realistic rent, a real vacancy allowance, real taxes and insurance, and a repair reserve. ROI calculated on optimistic numbers is not ROI at all, it is wishful thinking with a calculator. And as with any investment, compare the return against what the same cash could do elsewhere, because every dollar in a rental is a dollar not doing something else.

A note from Steve: nothing on this page is investment, legal, or tax advice. Markets move, and every property is different. Run your own numbers on the specific deal, and talk to your CPA and attorney before you commit.

Go a little deeper

Frequently asked

Questions investors often follow up on

What is the difference between ROI and cash on cash?

ROI is the general idea of return on your money; cash on cash is the specific rental measure of annual cash flow divided by cash invested. Real estate people also use cap rate, which ignores financing entirely. Use all three, and know which one you are looking at.

How do I count appreciation in my return?

Only conservatively. You can estimate long-term appreciation using historical local trends, but you do not realize it until you sell. In total return it belongs in the picture, just not as the thing that makes an otherwise weak deal look good.

What does a good cash on cash return look like?

It depends on the market, financing, and your goals. Many investors aim for a range that beats what the same money earns elsewhere after risk, and they compare properties against each other using the same method, which matters more than any single target number.

The Lockhart Method

Your Home | My Strategy | Proven Results

My strategy: we calculate your return on the money you really invest, with conservative inputs, and we compare it against your alternatives before you commit. You should know, in percentage terms, what your cash is earning and what it could earn elsewhere.

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