How rental property ROI is calculated
Net operating income (NOI) is annual rental income minus vacancy and operating expenses such as property tax, insurance, maintenance, management and HOA dues. NOI excludes your mortgage payment, which makes it a measure of the property itself rather than how you financed it.
Cap rate is NOI divided by the purchase price. It lets you compare properties on an unlevered basis — a $300,000 property with $18,000 of NOI has a 6% cap rate regardless of whether you pay cash or borrow.
Cash-on-cash return is annual pre-tax cash flow (NOI minus annual debt service) divided by the total cash you put in: down payment plus closing costs and any upfront repairs. It answers the question most investors actually care about: what is my cash earning?
Gross rent multiplier (GRM) is the purchase price divided by annual gross rent. It is a quick screening ratio — lower is generally better — but ignores expenses, so use it to filter deals, not to decide on them.
What counts as a good return?
There is no universal target. Many investors look for cash-on-cash returns of 8–12% and cap rates that beat the local market average, but expectations vary with interest rates, location and risk. A property in an appreciating market may justify a lower cash return; a property in a slower market usually needs a higher one.
Because the calculator shares inputs with the mortgage, depreciation, tax and break-even tools, you can check the same deal from every angle without re-entering numbers.
Frequently asked questions
What is the difference between cap rate and cash-on-cash return?
Cap rate measures the property’s return as if bought with cash (NOI ÷ price). Cash-on-cash return measures the return on the cash you actually invested after mortgage payments (annual cash flow ÷ cash invested). Leverage can make cash-on-cash much higher or lower than the cap rate.
Should I include a vacancy allowance?
Yes. Even well-run rentals sit empty between tenants. A 5–8% vacancy allowance is a common starting assumption; adjust it for your local market.
Does ROI include appreciation and tax benefits?
This calculator focuses on operating returns. Use the break-even calculator for appreciation and total return over time, and the depreciation and rental income tax calculators for tax effects.
More real estate calculators
For informational purposes only. Tax rules change and depend on your situation — consult a tax professional or financial advisor before making investment decisions.