How to Calculate Rental Property ROI: Formulas and Examples
Published by Myers Capital Hawaii
Before buying a rental property, estimate the income it can produce, the costs of owning it, and the cash required to acquire it. Several measures help answer different questions: cash flow shows what remains after expenses, cash-on-cash return measures income against your cash investment, and cap rate helps compare properties before financing.
How to calculate ROI on a rental property
Start by choosing the return you want to measure. For annual income from a financed rental, calculate cash flow after operating expenses and debt payments, then divide it by the total cash invested. For a return over the full ownership period, also account for the net proceeds when you sell.
- Estimate collected rent after vacancy and unpaid rent.
- Subtract operating expenses and loan payments to estimate annual pre-tax cash flow.
- Add the down payment, closing costs and initial out-of-pocket improvements to find the cash invested.
- Divide annual pre-tax cash flow by cash invested and multiply by 100 for annual cash-on-cash return.
- Repeat with lower rent and higher expenses before relying on the result.
In the example below, $4,800 in annual pre-tax cash flow divided by $75,000 in total cash invested equals a 6.4% cash-on-cash return. This is an illustration, not a forecast or loan-approval threshold.
A simple rental property example
The following simplified illustration uses the original article’s $300,000 purchase price and $2,500 monthly rent. It assumes all scheduled rent is collected and no additional capital expenditures during the year. It is not a current Hawaii market quote or a forecast.
| Item | Amount |
|---|---|
| Purchase price | $300,000 |
| Monthly rent | $2,500 |
| Monthly operating expenses | $500 |
| Monthly principal and interest payment | $1,600 |
| Monthly pre-tax cash flow | $400 |
| Annual pre-tax cash flow | $4,800 |
| Down payment | $60,000 |
1. Cash flow: what remains each month?
Cash flow = collected rental income − operating expenses − debt payments
In this example, $2,500 − $500 − $1,600 = $400 per month, or $4,800 per year before income taxes. Budget separately for vacancies and major repairs; these can reduce the cash available to you.
2. Net operating income: how does the property perform before financing?
NOI = effective rental and other property income − operating expenses
Under the example’s assumptions, annual NOI is $30,000 − $6,000 = $24,000. Operating expenses can include property taxes, insurance, management, maintenance, owner-paid utilities, and association fees. NOI excludes mortgage principal and interest, income taxes, depreciation, and capital improvements. Avoid counting taxes or insurance twice if your mortgage payment includes escrow.
3. Gross rent multiplier: how does price compare with rent?
Annual gross rent multiplier = purchase price ÷ annual gross rent
$300,000 ÷ $30,000 = 10. GRM is a quick screening ratio. It does not account for expenses, vacancies, financing, or repairs, so a GRM of 10 does not mean the investment or mortgage will be paid off in 10 years. Compare similar properties and investigate why their ratios differ.
4. Cash-on-cash return: what does your cash investment earn?
Using only the $60,000 down payment, $4,800 ÷ $60,000 × 100 = 8%. This simplified figure excludes additional acquisition costs. If closing costs and initial improvements add $15,000, the total cash invested becomes $75,000 and the return is 6.4%.
Dividing $30,000 of gross rent by the down payment would produce 50%, but that is not cash-on-cash return: it ignores operating expenses and debt payments.
What if rent is lower or expenses rise?
Using the same simplified example, start with $400 in monthly pre-tax cash flow. If collected rent is $250 lower each month and operating expenses are $100 higher, cash flow becomes $50 per month, or $600 per year. With $75,000 in cash invested, annual cash-on-cash return becomes 0.8%.
This illustration changes only those two assumptions. It does not forecast a property’s performance or include additional capital spending, income taxes or changes in property value. Use your own estimates to see how much room your budget has for unexpected costs.
5. Capitalization rate: how does income compare with price?
Cap rate = annual NOI ÷ purchase price or current property value × 100
Using the purchase price, $24,000 ÷ $300,000 × 100 = 8%. Cap rate excludes financing, making it useful when comparing properties with different loan structures. A higher cap rate does not automatically mean a better investment; it may reflect greater risk or weaker growth expectations.
Annual cash-on-cash return versus ROI when you sell
Annual cash-on-cash return measures ongoing cash income. To evaluate the entire ownership period, track all cash you invest and all cash you receive, including the net sale proceeds after selling costs and repayment of the remaining loan balance.
Simple holding-period ROI = (total cash received − total cash invested) ÷ total cash invested × 100.
Use consistent assumptions: if rental cash received is already net of operating expenses and debt payments, do not subtract those costs again. Include additional cash contributions for improvements or operating shortfalls. Do not add principal paydown separately when it is already reflected in your net sale proceeds.
This simple percentage is not annualized and does not account for the timing of each cash flow. State the ownership period and whether taxes are included. A projected selling price is uncertain; compare more than one scenario.
For background on return calculations and their assumptions, see Fidelity’s explanation of ROI and the SEC’s guide to investment performance claims.
Which rental-property measure should you use?
| Question | Measure to review |
|---|---|
| What remains after expenses and loan payments? | Cash flow |
| How does annual cash income compare with cash invested? | Cash-on-cash return |
| How does operating income compare with price, before financing? | Capitalization rate |
| What might the property be worth after renovations? | After-repair value, supported by comparable sales |
These measures are not interchangeable. Use the same time period and consistent assumptions when comparing properties. A return calculation does not establish loan eligibility.
Review ARV for renovation planning or DSCR financing for an income-producing property.
What is a good ROI on a rental property?
There is no single percentage that suits every property or investor. Compare properties using consistent income and expense assumptions, then consider location, condition, vacancy risk, financing, cash reserves, and your investment horizon. Cash-on-cash return does not include unrealized appreciation or principal paydown.
What should Hawaii rental investors check?
Verify property-specific rental restrictions, permitted use, association rules and fees, insurance costs, and maintenance needs before relying on projected rent. Review current requirements with the relevant county and qualified local professionals. Run a lower-rent or higher-expense scenario to see how much room the property has for unexpected costs.
Explore investment property financing, use our financing calculators, or learn about after-repair value when evaluating a renovation.
Discuss financing for your rental property
Have the property location, purchase price or estimated value, projected rent, operating expenses, loan purpose and timeline ready. Our team can discuss financing options alongside your property assumptions.
Educational examples only. Actual income, costs, loan terms, and investment outcomes vary.
