ROI Calculator Real Estate template

What is a Rental Property ROI Calculator?

A Rental ROI Calculator is an essential tool for real estate investors who want to quickly figure out how much cash flow they can generate from rental and lease payments after accounting for out-of-pocket and operational expenses, such as maintenance costs, taxes, insurance and mortgage payments, as well as vacancy rates.

Aside from calculating the total cash flow, a good Rental ROI Calculator will also show the Cash-on-Cash Return and Capitalization Rate so you can easily evaluate whether a residential or commercial property is worth the investment.

How to Calculate ROI for a Rental Property

Before you can calculate for a rental property’s ROI, you’ll first need to figure out your Net Operating Income or NOI. NOI is calculated by subtracting a rental property’s annual operating expenses from its gross operating income.

How to Calculate ROI for a Rental Property

Before calculating the ROI for a rental property, you’ll first need to figure out your Net Operating Income (NOI). NOI is calculated by subtracting a rental property’s annual operating expenses from its gross rental property income.

Net Operating Income = Gross Operating Income – Operating Expenses

A significant portion of a rental property’s gross operating income comes from rental and lease payments. Larger multifamily rental properties and sustainable rental properties can also generate additional income by charging for:

• Parking
• Storage
• Utilities
• Laundry Facilities

A rental property’s operating expenses typically include:

• Property taxes
• Insurance
• Repair and maintenance costs
• Property management fees (when you are not managing the property yourself)

Note that operating expenses do not include your mortgage payments if you’re using an investment property loan to finance one property or multiple rental properties. NOI is a key metric for lenders, as it provides a clear picture of a rental property’s income potential without being influenced by mortgage terms. By leaving out financing details, it’s easier to compare similar rental properties accurately.

One common way to evaluate and compare the potential return on rental property investments is by calculating the Capitalization Rate or Cap Rate. This is done by dividing your annual NOI by the current market value of the property.

A higher cap rate means higher income potential. Most investors look for a cap rate of at least 6%, but if you’re in an expensive city with inflated real estate prices, you might be looking at cap rates of around 4% or even less.

Cap rates tend to be smaller for Single Family Rentals (SFRs) and smaller Multi-Family Rentals (MFRs) compared to apartment buildings and commercial properties. Cap rates for commercial properties can be as high as 10% or more. A 10% cap rate means you can potentially get a return on your investment (ROI) in roughly 10 years if you bought the property entirely in cash.

Cap rate is really useful for comparing similar real estate opportunities. Obviously, the properties with higher cap rates are going to be more attractive investments. It’s all part of the due diligence required to find the best value and best deals possible.

How to Calculate Cash Flow and Cash-on-Cash ROI for a Rental

Net Cash Flow refers to your actual profits after deducting mortgage payments from your NOI. It reflects your real earnings after accounting for all rental income - expenses.

Another important metric real estate investors use to determine their ROI and profitability is Cash-on-Cash Return. Most investors leverage financing or an investment property loan to build their real estate portfolio.

They typically start by making an initial investment amount in one property or multiple rental properties and using rental income to pay down the mortgage. With this strategy, you don’t need to have millions of dollars upfront to have multiple rental units.

To calculate Cash-on-Cash Return, you first need to determine your Net Cash Flow.

Net Cash Flow is your actual profits after subtracting your mortgage payments from your NOI. You’ll get the same figure if you deduct all your operating expenses and mortgage payments from your total rental income.