In this article:
- Rental ROI calculator
- What is ROI?
- How to calculate ROI on rental property
- What is a good ROI for rental property?
- Additional formulas to calculate rate of return on rental property
A rental property can be a profitable real estate investment if you understand the risks involved as well as the potential return on investment (ROI). Our rental property calculator looks at the upfront investment costs, expenses and earnings to calculate the ROI. Simply adjust the sliders on the calculator below to customize the financial details.
Rental ROI calculator
Disclaimer: The information presented is not intended to be used as the sole basis of any investment decisions, nor should it be construed as advice designed to meet the investment needs of any particular investor. Nothing provided shall constitute financial, tax, legal, or accounting advice or individually tailored investment advice. This information is for educational purposes only. You are solely responsible for determining whether any investment is appropriate for you based on your personal investment objectives, financial circ*mstances, and risk tolerance.
What is ROI?
ROI, which stands for return on investment, is the probability of gaining a profit from the total money invested. When investing in a rental property, the amount of money coming in and going out (i.e. the cash flow) may provide a net gain or loss. The goal of rental property investing is to generate a positive cash flow, so the amount of money earned on the property is greater than the expenses going into managing the property.
Cost of investment
The amount of money spent on the rental property is considered the total cost of investment. Here are some of the expenses you’ll likely see as a rental property owner:
Purchase price: The amount paid by the investor for the rental property. The purchase price can be paid for in cash or be financed through a mortgage lender.
Down payment: A percentage of the purchase price that is paid upfront by the investor. A down payment between 20% and 30% is generally required for a rental property that will be rented out from day one.
Mortgage interest: The annual cost to borrow money from a lender, expressed as a percentage rate. See current mortgage rates.
Property tax: A tax expense paid on owned property. Property tax, which is usually based on the value of the property and land, may fluctuate.
Insurance: Homeowners insurance protects the property owner’s liability and insures the residence against damages and losses. The average annual premium on home insurance usually costs less than 1% of the purchase price. With rental property, there may be additional insurance coverage needed.
Operating expenses: Typically, the cost to operate a rental property is around 35% to 85% of the rental income or 1% of the property value per year. Operating expenses may include repair costs, maintenance costs, property management fees, HOA fees, advertising costs, utility costs or vacancy costs. You can use Zillow Rental Manager to help manage most of your landlording tasks to make getting paid easier.
Gains on investment
The amount of money earned from the rental property is considered the total investment gain or profit. Here are the typical gains that may come out of a rental property investment:
Rent: A tenant’s regular monthly payment to a landlord for the use of the property or land. Rent is generally the primary source of income on a rental property. Calculate a rent price for your rental property.
Appreciation: The increase in value of a property over time, expressed as an annual percentage rate. As a home rises in value, the investor can earn profit from the appreciation. The national appreciation value averages at around 3.5% to 3.8% per year.
Additional rental income: Any additional money earned from the tenant like income from utilities, laundry, storage or parking fees.
Use our free rental income and expense worksheet to keep track of your monthly cash flow.
How to calculate ROI on rental property
First, calculate the return on investment by subtracting the total gains from the cost. Then, divide the total return by the cost of investment to calculate the rental property ROI.
(Cost of Investment – Gains on Investment) / Cost of Investment = ROI
To convert the rental ROI to a percentage, multiply it by 100.
ROI * 100 = ROI Percentage
For instance, if you invested $50,000 in a rental property and received a profit of $70,000, the ROI would be 0.4 or 40%.
($70,000 – $50,000) / $50,000 = 0.4
0.4 * 100 = 40%
What is a good ROI for rental property?
A good ROI for rental property is relative to how much you’ve invested and are hoping to gain. The rate of return may vary depending on the type of financing, the size of the rental, the location, the market and the overall risk.
You can use the median net income on rent as a baseline to determine if your rental property investment will yield a positive return. The median net income on rent for landlords with any rental income (positive or negative) is $3,783, while the median net income on rent that saw only a positive return is $6,000.* If your net income on rent is above $3,783, your investment is most likely doing well.
Additional formulas to calculate rate of return on rental property
Our rental income calculator includes the gross yield, cap rate and cash ROI in addition to the annual return and total return to give you a holistic view of your potential return on investment. If you want to learn more about how these values are calculated, review the rental calculations below.
Net operating income (NOI)
The net operating income (NOI), or cash flow, is the total revenue that remains after subtracting operating expenses. To calculate annual NOI, take the total cash flow coming in each month and subtract the total expenses paid throughout the year.
Annual Income – Annual Expenses = Annual NOI
For instance, if you made $900 in rental income each month and paid $300 each month in expenses, your annual net operating income would equal $7,200.
($900 * 12) – ($300 * 12) = $7,200
A negative cash flow, where your expenses are consistently higher than your income, could negatively impact the rate of return on investment.
Annual return
To calculate the return you’d receive over a period of time, subtract the purchase price from the appreciated home value; then add the net operating income.
(Appreciated Home Value – Purchase Price) + NOI = Annual Return
For instance, say the rental property was originally purchased for $200,000, and — after 1 year of appreciation — the property is now valued at $215,000, a $15,000 profit. The appreciated home value (or market value) would equal $215,000. If your net operating income (NOI) came out to $7,200, the annual rental property return would equal $22,200.
($215,000 – $200,000) + $7,200 = $22,200
Use our investment property calculator to calculate the annual rate of return on your rental property.
Home equity
Home equity is the market value of the rental property minus any outstanding balances owed. If you took out a mortgage to finance the purchase, you’d subtract the remaining loan principal from the initial loan principal and add the balance to the total down payment amount. This will help you calculate the home’s equity.
Down Payment Total + (Loan Principal – Remaining Loan Principal) = Home Equity
For example, say you put $40,000 down on a $200,000 mortgage. The initial loan principal would equal $160,000. If you made monthly mortgage payments of $859 for a year, the remaining loan principal would equal $149,692, and the total equity on the home would equal $50,308.
$40,000 + ($160,000 – $149,693) = $50,308
Cash ROI
The cash-on-cash return, or cash ROI, is the annual rate of return on a rental property based on the cash earned in relation to the cash invested. To calculate the cash ROI, divide the net operating income (NOI) by the home equity. To convert the cash ROI to a percentage, multiply it by 100.
NOI / Home Equity = Cash-on-cash ROI
The cash-on-cash return is typically used for rental property investments paid for in cash. If you paid $200,000 cash for a rental property, the net operating income (NOI) would equal $7,200, and the home equity would equal $50,308. The cash-on-cash ROI would equal 14.31%.
$7,200 / $50,308 = 0.1431
0.1431*100 = 14.31%
The return on investment may vary if a rental property is financed. Our rental cash flow calculator allows you to adjust financing as needed to estimate the cash ROI after one year.
Cap rate
Capitalization rate, or cap rate, is the ratio of net operating income (NOI) in relation to the current market value of the home. Divide the NOI by the appreciated home value to calculate the cap rate. To convert the cap rate to a percentage, multiply it by 100.
NOI / Appreciated Home Value = Cap Rate
For instance, if the net operating income is $7,200 and the appreciated home value is $215,000, the cap rate would equal 3.35%.
$7,200 / $215,000 = 0.0335
0.0335 * 100 = 3.35%
Use our rental income calculator to see the cap rate over 5, 10, 20 and 30 years.
Gross yield
Gross yield on a rental property is the percentage of profit before expenses have been deducted. To calculate, first multiply the monthly rent amount by the number of months in the year to determine the income from rent; then, divide the income from rent by the appreciated home value.
(Monthly Rent * 12) / Appreciated Home Value = Gross Yield
For example, if the monthly rent is $900, the total income from rent for the year would equal $10,800. If the appreciated home value equals $215,000, the gross yield would be 5.02%.
($900 * 12) / $215,000 = 0.0502
0.0502 * 100 = 5.02%
Our rental property calculator will show you the gross yield over 5, 10, 20 and 30 years.
*Zillow Analysis of US Census Bureau, Current Population Survey Annual Social and Economic Supplement, 2020
