Investor guide

How to calculate rental property ROI

Rental property ROI tells you whether a deal will actually make you money. This guide walks through the three numbers every investor should run before making an offer — cap rate, cash-on-cash return, and total ROI — using the exact formulas powering the Sumline analyzer.

1. Start with Net Operating Income (NOI)

NOI is the annual income a property generates after operating expenses, but before mortgage payments. It is the foundation of every real-estate return metric.

NOI = (Gross annual rent × (1 − vacancy %)) − operating expenses

Operating expenses include property tax, insurance, HOA, maintenance, and property management. Mortgage principal and interest are not operating expenses — they're financing costs.

2. Cap rate — the unlevered yield

Cap rate compares NOI to purchase price. It's how investors compare deals apples-to-apples, ignoring how each buyer finances them.

Cap rate = NOI ÷ Purchase price

On a $450,000 property generating $27,000 NOI, the cap rate is 6.0%. Most US residential rentals trade in the 5–10% range; lower cap rates usually mean a hotter appreciation market.

3. Cash-on-cash return — your leveraged yield

Cash-on-cash (CoC) measures the return on the actual cash you put in. Because most investors use a mortgage, CoC is usually the more relevant number for personal-portfolio decisions.

CoC = Annual pre-tax cash flow ÷ Total cash invested

Annual cash flow = NOI − annual mortgage payments.
Total cash invested = down payment + closing costs + upfront repairs.

Example: $450,000 purchase, 20% down ($90,000) + $13,500 closing = $103,500 invested. NOI of $27,000 minus $21,000 mortgage = $6,000 cash flow. CoC = 5.8%.

4. Equity build-up and appreciation

Beyond cash flow, two silent wealth drivers compound every month: your tenant pays down the loan balance, and the property (usually) appreciates. Sumline projects both year-by-year.

Equity at exit = Projected value − Remaining loan balance − Selling costs

5. Total ROI over your hold period

The complete picture combines cash flow, principal paydown, and appreciation across however long you plan to hold.

Total ROI = (Cumulative cash flow + Equity at exit − Initial investment) ÷ Initial investment

A 10% cap rate looks great on paper, but a 5% cap rate in a market appreciating 4%/year can easily produce a higher total ROI. Always model the full hold period.

Skip the spreadsheet

Every formula above is wired into the free Sumline investor analyzer. Plug in purchase price, rent, expenses, and your hold period — and watch cap rate, cash-on-cash, equity build-up, and total ROI update in real time.

Open the rental property calculator

Rental property ROI FAQ

The questions investors ask most before running the numbers on a deal.

What is ROI on a rental property?

Return on investment (ROI) on a rental property measures the profit you earn relative to the cash you put in. It combines annual cash flow, loan principal paydown, and appreciation over your hold period, then divides by your initial investment (down payment + closing costs + upfront repairs).

How do you calculate cap rate?

Cap rate = Annual Net Operating Income (NOI) ÷ Purchase price. NOI is gross rent minus vacancy and operating expenses (property tax, insurance, management, maintenance, HOA) but before mortgage payments. Most US residential rentals trade between a 5% and 10% cap rate.

What is a good cash-on-cash return for a rental?

Cash-on-cash return = Annual pre-tax cash flow ÷ Total cash invested. Most long-term US rental investors target 8–12% cash-on-cash. Short-term rentals often aim higher (12%+) to compensate for management intensity and revenue volatility.

What's the difference between cap rate and cash-on-cash return?

Cap rate ignores financing — it's the unlevered yield on the purchase price. Cash-on-cash reflects leverage, dividing after-mortgage cash flow by the cash you actually invested. Two buyers of the same property will share a cap rate but have very different cash-on-cash returns based on their loans.

What counts as an operating expense vs. a capital expenditure (capex)?

Operating expenses are recurring costs to run the property: taxes, insurance, HOA, management, routine maintenance, utilities. Capex is long-life replacements: roof, HVAC, water heater, appliances. Cap rate uses operating expenses only; total ROI should reserve for capex separately (a common rule is 5–10% of rent).

How much should I budget for vacancy and property management?

Typical US assumptions are 5–8% vacancy for long-term rentals and 8–10% of collected rent for full-service property management. Short-term rentals often model 20–30% vacancy and 20%+ management fees. Sumline lets you edit every input to match your local market.

What is the 1% rule in real estate?

The 1% rule says a rental should produce monthly gross rent of at least 1% of the purchase price ($2,500/mo on a $250,000 house). It's a fast screen, not a decision tool — cap rate and cash-on-cash are what actually drive returns.

What is the 50% rule?

The 50% rule estimates that operating expenses (excluding mortgage) will consume about half of gross rent over time. It's useful for back-of-envelope screening in high-tax or high-insurance markets, but always underwrite the actual line items before making an offer.

How do I calculate total ROI over a hold period?

Total ROI = (Cumulative cash flow + Equity at exit − Initial investment) ÷ Initial investment. Equity at exit = Projected sale price − Remaining loan balance − Selling costs. A lower-cap-rate property in an appreciating market often beats a higher-cap-rate cash cow once you include equity and appreciation.

Should I include selling and closing costs in my ROI calculation?

Yes. Ignoring them is the most common ROI mistake. Include acquisition closing costs in your initial investment, and subtract projected selling costs (agent commissions, transfer tax, title, prorations — typically 7–9% of sale price) from equity at exit.

How does appreciation affect rental property ROI?

Even a modest 3–4% annual appreciation compounds into the largest component of total ROI over a 5–10 year hold. Sumline projects year-by-year value and equity so you can compare cash-flow-heavy and appreciation-heavy deals on the same footing.

What is the difference between total ROI and annualized ROI?

Total ROI is the cumulative return over your entire hold. Annualized ROI (IRR-style) converts it to a yearly rate so you can compare a 3-year flip to a 10-year rental. Always compare deals on the same time basis — a 60% total ROI over 10 years is only ~4.8% annualized.