How to Analyze a Rental Property’s ROI: A Step-by-Step Guide

Investing in rental properties can be lucrative - if you know how to calculate the true return. Many beginners overestimate profits by ignoring hidden costs. This guide will walk you through the exact steps to analyze any rental property’s ROI like a pro.

Step 1: Calculate the Purchase Costs

Before estimating profits, account for all upfront expenses:

• Purchase price

• Closing costs (2-5% of price)

• Renovation/repair costs (if needed)

• Initial vacancy & leasing fees

Example:

• Purchase price: $200,000

• Closing costs: $6,000

• Repairs: $10,000

• Total investment = $216,000

Step 2: Estimate Monthly Income & Expenses

A. Gross Rental Income

• Market rent (check Zillow/Rentometer)

• Additional income (laundry, parking, storage)

B. Monthly Expenses

Expense	Typical Cost
Mortgage (P&I)	Varies
Property taxes	1-2% of value/year
Insurance	800−800−2,000/year
Maintenance	5-10% of rent
Property management	8-12% of rent
Vacancy (5-10%)	Reserve for empty months
CapEx (roof, HVAC)	5% of rent

Example:

• Rent: $1,800/month

• Expenses: $1,200/month

• Net cash flow = $600/month

Step 3: Calculate Key ROI Metrics

1. Cash-on-Cash Return (CoC)

Formula:

(Annual Cash Flow / Total Cash Invested) x 100  

Example:

• Annual cash flow: 7,200(7,200(600 x 12)

• Down payment + repairs: $56,000

• CoC = (7,200/7,200/56,000) x 100 = 12.8%

Good CoC: 8-12%+

2. Cap Rate (For All-Cash Purchases)

Formula:

(Net Operating Income / Property Price) x 100  

Example:

• NOI (rent - expenses - no mortgage): $14,400/year

• Property price: $200,000

• Cap rate = (14,400/14,400/200,000) x 100 = 7.2%

Good cap rate: 6-10% (varies by market)

3. Total ROI (Appreciation + Cash Flow)

• Estimate annual appreciation (historically 3-5%)

• Add cash flow + equity paydown

Example:

• Appreciation (3% of 200,000)=200,000)=6,000/year

• Cash flow = $7,200/year

• Total ROI = 13,200/year( 23.613,200/year( 23.656k invested)