How to Calculate ROI on Rental Properties: 4 Methods Compared
ROI (return on investment) for rental properties can be calculated several ways, and each method tells a different story. Using the wrong method can make a bad deal look good or a good deal look mediocre. This guide covers the four most common ROI methods and when to use each.
Method 1: Cash-on-cash return
CoC Return = Annual Cash Flow / Total Cash Invested
Cash flow = rent minus all expenses including mortgage. Cash invested = down payment + closing costs + initial repairs. This measures the return on YOUR actual out-of-pocket dollars. Target: 8-12%+ for a good deal.
Example: $5,400 annual cash flow / $52,000 cash invested = 10.4% cash-on-cash return.
Method 2: Cap rate
Cap Rate = NOI / Property Value
NOI = rent minus operating expenses (NOT mortgage). This measures the property's unleveraged return, allowing apples-to-apples comparison regardless of financing. Target: 6-8% for most residential rentals.
Method 3: Total ROI (annualized)
Total ROI = (Cash Flow + Equity Buildup + Appreciation + Tax Savings) / Cash Invested
This captures all four wealth-building components of rental investing. A property with 5% cash-on-cash, 3% mortgage paydown, 3% appreciation, and 2% tax savings has a 13% total ROI. This is the most comprehensive method but requires assumptions about appreciation and tax rates.
Method 4: Internal rate of return (IRR)
IRR accounts for the time value of money across the entire hold period. It calculates the discount rate at which your total investment (initial cash + future cash flows + eventual sale) has a net present value of zero. IRR is most useful for comparing properties with different hold periods and cash flow patterns. Target: 12-15%+ for a good rental investment.
Which method to use when
| Situation | Best Method | Why |
|---|---|---|
| Quick screening | Cap rate | Fast, no financing assumptions needed |
| Comparing deals with same down payment | Cash-on-cash | Measures actual cash return |
| Long-term hold analysis | Total ROI or IRR | Captures all return components |
| Presenting to rental buyers | Cash-on-cash + cap rate | Buyers understand both metrics |
Related guides
- How to Analyze a Rental Property
- Cap Rate Explained
- How to Calculate Rental Yield
- Rental Cash Flow Analysis
- How to Calculate DSCR