How to Calculate ROI on a Rental Property

Before you buy a rental property — or evaluate whether your existing one is performing — you need to know your numbers. The problem is that "ROI" gets used loosely. It can mean gross yield, net yield, cash-on-cash return, or total return depending on who you ask.

This guide breaks down each metric, shows you how to calculate it, and explains which ones actually matter.

The four metrics that matter

| Metric | What it measures | |---|---| | Gross rental yield | Revenue as a percentage of purchase price | | Net rental yield | Profit after expenses as a % of purchase price | | Cap rate | Net income as a % of value (ignores financing) | | Cash-on-cash return | Cash profit as a % of cash invested |

Each one tells you something different. Sophisticated investors look at all four.

1. Gross rental yield

The quickest way to compare properties.

Gross rental yield = (Annual gross rent ÷ Purchase price) × 100

Example:

• Purchase price: $650,000
• Monthly rent: $2,600
• Annual rent: $31,200

$31,200 ÷ $650,000 × 100 = 4.8% gross yield

Gross yield tells you nothing about expenses, vacancies, or financing. Use it as a fast filter when scanning listings — anything under 4% in a high-cost market is worth scrutinizing more carefully.

2. Net rental yield

More realistic than gross yield. Still ignores financing.

Net rental yield = ((Annual rent − Annual expenses) ÷ Purchase price) × 100

Annual expenses to include:

• Property tax
• Insurance
• Maintenance and repairs (budget 1–2% of property value per year)
• Property management fees (8–12% of rent if applicable)
• Vacancy allowance (5–8% is typical)
• Utilities you pay

Example (same property):

• Annual rent: $31,200
• Property tax: $4,800
• Insurance: $1,500
• Maintenance reserve: $6,500 (1% of value)
• Vacancy allowance: $1,560 (5%)
• Total expenses: $14,360

($31,200 − $14,360) ÷ $650,000 × 100 = 2.6% net yield

Net yield below 2% typically signals a property that relies heavily on appreciation rather than income. That isn't necessarily bad — but it means your cash flow will likely be negative.

3. Cap rate (capitalization rate)

The standard metric used by professional investors and appraisers.

Cap rate = (Net operating income ÷ Current property value) × 100

Net operating income (NOI) is your annual income minus operating expenses, before mortgage payments. Cap rate deliberately excludes financing so you can compare properties regardless of how they're bought.

Example:

• NOI: $16,840 (annual rent minus operating expenses, no mortgage)
• Property value: $650,000

$16,840 ÷ $650,000 × 100 = 2.6% cap rate

What's a good cap rate?

Cap rates vary significantly by market. Dense, high-demand urban markets (New York, London, Sydney, Toronto) typically compress to 3–4% because buyers are pricing in appreciation. Mid-sized and secondary cities often land in the 5–7% range, offering better cash flow but less historical price growth. Smaller markets and rural areas can reach 8–10%+.

A cap rate lower than the prevailing mortgage rate in your market almost always means negative cash flow — you're relying on appreciation to make the numbers work.

4. Cash-on-cash return

The metric that matters most if you're using a mortgage.

Cash-on-cash return = (Annual pre-tax cash flow ÷ Total cash invested) × 100

Cash flow = rental income − all expenses − mortgage payments

Total cash invested = down payment + closing costs + any immediate repairs

Example:

• Annual rent: $31,200

• Operating expenses: $14,360

• Annual mortgage payments: $24,600 (25yr amortization, 5.5% rate, 20% down)

• Annual cash flow: $31,200 − $14,360 − $24,600 = −$7,760

• Down payment (20%): $130,000

• Closing costs (transfer tax, legal, inspection): ~$16,000

• Total cash invested: $146,000

−$7,760 ÷ $146,000 × 100 = −5.3% cash-on-cash return

This property loses money monthly. That doesn't automatically make it a bad investment — if it appreciates 5% per year it still comes out ahead — but the investor needs reserves to cover the shortfall every month.

Positive cash-on-cash return means the property pays for itself. In most high-cost urban markets today, that's rare without a large down payment.

Total return: the full picture

Cap rate and cash-on-cash only capture income. For many landlords, appreciation is the dominant driver of long-term returns.

Total return = Cash flow + Principal paydown + Appreciation

Example (5-year hold on the same property):

| Component | 5-year total | |---|---| | Cash flow (negative) | −$38,800 | | Principal paydown | +$31,400 | | Appreciation (4%/yr) | +$141,000 | | Total gain | +$133,600 |

On $146,000 invested, that's a 91% return over 5 years — even with negative monthly cash flow. Leverage amplifies appreciation dramatically.

The risk: if appreciation is flat or negative, a negative cash-flow property destroys capital instead of building it.

A simple rule of thumb: the 1% rule

The 1% rule says a property's monthly rent should be at least 1% of its purchase price.

• $300,000 property → needs $3,000/month rent
• $650,000 property → needs $6,500/month rent

In most major cities worldwide, this rule is nearly impossible to hit. Investors in expensive urban markets use it as a reference point, not a hard requirement, because those markets operate on appreciation expectations rather than income yields. The rule is more achievable in secondary cities and smaller markets.

Location-specific costs to factor in

Your local market will have acquisition costs that affect your effective return. Common ones to research:

Transfer taxes: Most jurisdictions charge a tax on property purchases. In some major cities, both state/provincial and municipal transfer taxes apply on top of each other — these can add 2–4% to your purchase cost.

Financing rules: Lenders in different markets apply stress tests, debt-service coverage ratios, or foreign buyer restrictions that affect how much you can borrow and at what rate.

Capital gains tax: Understand how investment property gains are taxed in your jurisdiction before you plan your exit. The treatment of primary residence vs. investment property varies significantly by country.

New construction: Purchasing a newly built rental property may trigger VAT, GST, or other consumption taxes depending on your jurisdiction.

Always run your final numbers with a local accountant who knows the tax rules for your specific market.

What numbers should you actually target?

There's no universal "good" ROI for a rental property — it depends on your goals:

Cash flow focused: Look for markets with cap rates above 5%. You'll typically find this in secondary cities and smaller markets. Target cash-on-cash returns of at least 4–6%.

Appreciation focused: Accept negative or break-even cash flow in high-demand urban markets, betting on long-term price growth. Make sure you have reserves to absorb monthly shortfalls.

Balanced approach: Target properties where rent covers at least operating expenses plus mortgage interest, even if it doesn't cover full principal paydown. This minimizes your out-of-pocket carry cost while still building equity.

Track your actual numbers over time

Projections are guesses. Once you own the property, track actual income and expenses monthly. Know your real cap rate, real cash-on-cash return, and real NOI — not the ones you modelled at purchase.

Tools like Onsite let you log income and expenses per property so you always know where you stand, without building spreadsheets from scratch.

The landlords who build wealth aren't always the ones who picked the best properties at purchase — they're the ones who managed them well once they owned them.