What is ROI on a rental property?+
Rental property ROI is the total annual return on the cash you have invested, expressed as a percentage. It includes four components: (1) cash flow from operations, (2) principal paydown on the loan, (3) appreciation of the property, and (4) tax savings (often excluded from the headline number). True ROI is the sum of all four divided by your total cash in.
ROI vs. cap rate vs. cash-on-cash — what's the difference?+
Cap rate = NOI / property value (ignores financing). Cash-on-cash = annual cash flow / cash invested (financed yield, year 1). Total ROI = cash flow + paydown + appreciation / cash invested (the complete picture). A property might have 5% cap rate, 7% CoC, and 18% total ROI when you include appreciation and paydown. All three numbers tell different stories.
What's a good rental property ROI?+
8-12% cash flow ROI alone is solid in most markets. Total ROI (with appreciation + paydown) of 15-25% is achievable on a well-bought property in a normal market. Anything over 25% means you bought below market or you're projecting aggressive appreciation. Be skeptical of any model showing 35%+ ROI on a normal rental — usually a sign of overly optimistic appreciation or rent growth assumptions.
Should I count appreciation in ROI?+
It's controversial. Pros: appreciation is real and historical median is 3-4% nationally (higher in many growth markets). Cons: appreciation is unrealized until you sell, and it can go negative for years (2008-2011, 2022-2023 in some markets). Best practice: show ROI with and without appreciation. Make decisions based on cash flow ROI; treat appreciation as upside.
What appreciation rate should I use?+
National long-term median is 3-4%. Coastal/growth markets average 4-6% (with more volatility). Slow secondary markets average 1-3%. For 5-7 year projections, use 3% as a conservative base case. Don't model 5%+ unless you're explicitly underwriting a high-growth market — and even then, run a 0% appreciation scenario to verify the deal still works without it.
What rent growth rate is realistic?+
National historical rent growth is 3-3.5% annually. Hot markets have hit 5-7% in good years but mean-reverted. Use 2-3% as a base case for 5-year underwriting. Anything higher requires market-specific evidence (job growth, in-migration, supply constraint). Important: don't model rent growth above your expense growth — if rents go up 3% and expenses go up 5%, you actually lose ground year-over-year.
How does leverage affect ROI?+
Leverage amplifies returns (and risk). All-cash: 6% cap rate ≈ 6% cash flow ROI. 75% LTV: same property might produce 10-14% cash-on-cash and 20-25% total ROI — because you're earning the spread on borrowed money. The catch: if the property drops 20% in value, your equity drops 80% with 75% LTV. Higher ROI ≠ better deal. Higher risk-adjusted ROI = better deal.
What expenses should I include?+
Be exhaustive: property taxes, insurance, property management (8-10% of rent if you don't do it yourself; opportunity cost if you do), repairs/maintenance (5-15% depending on age), vacancy (5-10%), capex reserve for big items (3-5%), utilities you pay, HOA, lawn/snow, accounting, legal, advertising. Investors who underestimate expenses get crushed in year 3 when the roof and HVAC both fail.
How do I project 5 years out without guessing?+
Use conservative defaults: 2-3% rent growth, 3-4% expense growth, 3% appreciation, fixed mortgage payment (most rentals carry 30-yr fixed), 5-8% vacancy throughout. Build the model in nominal dollars, then sense-check the year-5 NOI against current market cap rates to see if your projected ARV is reasonable. If year-5 NOI / current cap rate > your projected value, you're double-counting appreciation.
Does this calculator include taxes?+
No. ROI here is pre-tax. After-tax ROI requires modeling depreciation, your marginal rate, whether you can use passive losses, and disposition tax (recapture + capital gains). For most analyses, pre-tax ROI is the right comparison metric. Use the cost segregation calculator for the tax angle and combine both for the after-tax view.