How to Calculate Return on Investment for a Rental Property

Whether you’re evaluating a new opportunity or checking in on your current portfolio, one thing every rental property owner should understand is how to calculate return on investment for rental property. ROI is a quick way to measure how your investment is performing—and where there’s room to improve.

This guide breaks down the basics and gives you examples to help you calculate ROI with confidence.

What Is ROI in Real Estate?

Return on investment (ROI) measures how much profit you’re making compared to what you’ve spent. It’s usually shown as a percentage and helps you evaluate how well your property is performing financially. The higher the ROI, the more profitable the investment.

ROI takes into account more than just the purchase price. It includes things like closing costs, repairs, ongoing maintenance, property management fees, and other expenses. 

A basic ROI formula looks like this:

ROI = (Net Profit ÷ Total Investment) × 100

So if you make $10,000 in profit on a $100,000 investment, your ROI is 10%.

Why Is ROI Important for Rental Properties?

Your ROI acts like a report card for your rental property. It shows how much money you’re making relative to your investment and can help you decide whether to buy, sell, or hold a property.

Knowing your ROI helps you:

• Understand how well your property is performing financially
• Compare different investment opportunities
• Identify underperforming properties
• Make smarter decisions about renovations, pricing, or selling

Even if you’re only renting out one home, tracking ROI gives you a clear picture of how much value you’re actually getting from your investment.

What Makes ROI Calculations Tricky?

At first glance, ROI might seem like a simple formula, but in real estate, there are several factors that can make the calculation a bit trickier. Real estate has a lot of moving parts:

• Property values can fluctuate
• Expenses vary widely depending on repairs, management, and taxes
• Financing terms add complexity
• ROI changes over time

Because of this, using a reliable method (and keeping your numbers up to date) is key.

How to Calculate ROI on a Rental Property

There are two common ways to calculate ROI:

1. ROI for a Cash Purchase

This is the simpler scenario. Here’s how it works:

Let’s say you:

• Pay $300,000 in cash for the property
• Spend $2,500 on closing costs
• Invest $7,500 in renovations

Your total investment is $310,000.

Now, let’s say the rent is $2,000/month, giving you $24,000 in annual rental income. Subtract $5,000 in expenses, and your annual net profit is $19,000.

ROI = (Net Profit ÷ Total Investment) × 100

ROI = ($19,000 ÷ $310,000) × 100 = 6.13%

In this case, your return on investment is 6.13%.

2. ROI with a Mortgage

Calculating ROI becomes more complicated when financing is involved. Here's what you need to include:

• Down payment
• Closing costs
• Renovation costs
• Mortgage payments (including interest)
• Property taxes, insurance, and ongoing expenses

For this scenario, let’s say:

• You put $60,000 down
• Closing and renovation costs total $10,000
• Your monthly mortgage payment is $1,200
• Rent remains $2,000/month

After subtracting mortgage and other expenses from your rental income, you calculate your annual net income.

Then use the same formula:

ROI = (Annual Net Profit ÷ Total Cash Invested) × 100

This version shows your ROI based on your actual cash out of pocket, not the entire property price.

Which ROI Calculation Should You Use?

• Use the cash purchase method if you paid in full with no loan
• Use the mortgage method if you financed the property

Both give you valuable insight but make sure to compare apples to apples when looking at different properties.

What ROI Is Considered “Good”?

There’s no one-size-fits-all number when it comes to a good return on investment. However, many real estate investors use a benchmark of 8% to 12% ROI as a general target for long-term rental properties. This range typically reflects a healthy balance between income generation and risk.

That said, what qualifies as a strong ROI can vary based on several factors:

• Market conditions: In high-demand, competitive markets like Seattle, investors may accept a lower ROI (sometimes in the 5% to 7% range) because the property is likely to appreciate significantly over time.
• Property type and location: Single-family homes, multifamily units, and commercial properties each carry different earning potentials and risk profiles.
• Investor goals and risk tolerance: Some investors prioritize steady cash flow, while others are focused on long-term equity growth or tax advantages.

In short, a “good” ROI depends on your specific investment strategy. A slightly lower return might be acceptable if the asset is in a desirable location with strong appreciation potential, minimal vacancy risk, or stable long-term tenants.

How Can a Property Manager Help Improve ROI?

Working with a professional management company like Real Property Associates can boost your ROI by:

• Minimizing vacancy time
• Screening tenants more effectively
• Handling maintenance quickly and affordably
• Setting optimal rental rates based on the market
• Offering expert insight into property performance
  
  

If your ROI isn’t where it should be, a good property manager can help you turn things around.

Determine Your Return on Investment Now

Seattle property management professionals help investors calculate and maximize ROIs for every rental property. An accurate estimate of your ROI can give you a baseline of the success of your real estate portfolio. If you're not sure about the math or how to improve the returns on a property that isn't performing well, Real Property Associates is here to help! 

Use our free ROI Calculator: A Step-by-Step Guide to Calculating the Return on Investment For Your Rental Property, today to understand rental property ROIs!