How to Calculate Rental Property ROI: Formulas and Examples
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.
Rental property ROI at a glance
ROI broadly compares an investment’s net gain with its cost over a stated period. For a rental financed with a loan, annual cash-on-cash return is a useful measure of ongoing cash income. It is not the same as total return, which can also reflect changes in property value and equity.
Annual cash-on-cash return = annual pre-tax cash flow ÷ total cash invested × 100
Use cash flow after operating expenses and loan payments—not gross rent. Include your down payment, closing costs, and initial out-of-pocket improvements in the cash-invested total.
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.
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.
