What Is Rental Property ROI?
Rental property ROI measures how effectively your investment capital generates income from a rental property. The most common metric is the cash-on-cash return, which compares your annual pre-tax cash flow to the total cash you invested (down payment plus closing costs).
Unlike cap rate, cash-on-cash return accounts for financing, making it more practical for leveraged investors. A property with 20% down payment and favorable financing can produce significantly higher cash-on-cash returns than an all-cash purchase.
Rental Property ROI Formulas
Typical Operating Expenses
| Expense Category | Typical % of Rent | Notes |
|---|---|---|
| Property Taxes | 10-15% | Varies by location |
| Insurance | 5-8% | Landlord policy required |
| Maintenance/Repairs | 5-10% | Higher for older properties |
| Vacancy Reserve | 5-8% | Assume some vacant months |
| Property Management | 8-10% | If not self-managing |
Frequently Asked Questions
What is a good cash-on-cash return for rental property?
Most investors target 8-12% cash-on-cash return. In expensive markets, 5-7% may be acceptable if there is strong appreciation potential. Returns above 12% are excellent but less common in competitive markets.
What expenses should I include in operating costs?
Include property taxes, insurance, repairs/maintenance, property management fees, vacancy reserves, HOA fees (if applicable), and utilities you pay. Do not include mortgage principal and interest -- those go separately.
How does leverage affect rental property ROI?
Leverage amplifies returns. If you buy a $300,000 property with $60,000 down and it generates $7,200 in annual cash flow, your cash-on-cash return is 12%. Without leverage, the same property might yield only 5-6% on the full purchase price.