How to calculate ROI On Your Rental – An investors guide

There are multiple angles to calculating an ROI on a rental…

(And we’ll list all of them below).

But the TLDR version and number one way to calculate it in our opinion is by using the financial calculator (here’s the app).

calculating ROI with this calculator

It’s a very simple tool to use but it’s a must to know how to use it as an investor.

It takes into account:

  1. Initial cash investment
  2. payments (or cash flow you’re receiving)
  3. Interest rate (or yield)
  4. Terms (how long the investment lasts — typically you’d put 360 for a house)
  5. and future value

All you do is fill in the blanks, and it solves for you.

Here’s a quick video showing you how to use it to calculate your return on your cash:

Ok, so that’s that…

Let’s get into 5 other ways you can calculate ROI on a rental property…

1. Basic Roi Calculator

Basic ROI calculator

Simpler than using the 10bii.

And it’s limited as it won’t take into account the actually CASH you have in play.

And that’s important. Because most likely you won’t be using ALL your cash.

But here are some details about it:

  1. Annual Rental Income = Monthly rent × 12
  2. Annual Expenses = Costs including maintenance, property taxes, insurance, property management, etc.
  3. Total Property Cost = Purchase price + closing costs + rehab costs

2. Cash on Cash Return

A very simple calculation to look at your annual return TODAY on the cash invested:

cash on cash return for ROI rentals

3. Total ROI

This method factors in the overall gain, including both rental income and appreciation.

Total ROI

4. Cap Rate

This is similar to the basic ROI but doesn’t consider financing. It’s often used to compare different rental properties.

Cap rate calculation

Net Operating Income = Annual Rental Income – Operating Expenses (excluding mortgage)

5. Internal Rate of Return

IRR is a more complex method that takes into account the time value of money. It calculates the rate at which the present value of future cash flows (rental income) and the sale of the property equals the initial investment. This method requires more detailed cash flow projections and usually a financial calculator or spreadsheet software to solve.

Here’s a short video on this calculation for your rental

Remember, while these calculations can provide valuable insights into the potential return on a rental property, they should be used in conjunction with other due diligence processes. Consider factors like the local real estate market, the condition of the property, tenant quality, and more before making an investment decision.

Other metrics to consider in a calculating ROI

1. Net Operating Income (NOI): This is the annual revenue from a property after operating expenses (excluding mortgage) have been deducted, but before taxes and interest are taken out. It’s a core number that reflects the operational profitability of the property.

2. Vacancy Rate: This is the percentage of time a rental property is vacant over a specific period. A lower vacancy rate typically indicates a desirable property in a hot market, while a high rate may suggest potential issues or an oversaturated market.

3. Break-Even Ratio (BER): This KPI (key performance indicator) tells you the percentage of rental income used to cover operating expenses and debt service (mortgage). It helps in understanding if the property can sustain itself from the income it generates.

4. Debt Service Coverage Ratio (DSCR): DSCR gives an indication of the cash flow available to cover annual debt obligations (like a mortgage). A DSCR above 1 indicates that there’s enough net income to cover the debt, while a DSCR below 1 suggests potential financial strain.

5. Gross Rent Multiplier (GRM): This is a quick and dirty metric used to assess the relative value of a property. A lower GRM can indicate a potential bargain, while a high GRM may suggest overvaluation.

6. Operating Expense Ratio (OER): This metric shows what proportion of a property’s income is consumed by its operating expenses

7. Maintenance and Capital Expenditures (CapEx) Reserve: While not a “ratio” or “rate” per se, prudent investors often set aside a certain percentage of rental income for future large expenses like replacing a roof or major appliances. This ensures they’re not caught off-guard by big bills.


With all these metric the NUMER 1 metric/KPI. or number (or whatever you want to call it)… is this:

Cash flow is king

No matter what…

You want your property to cash flow SOMETHING.

At least $100.

This is taking into account your property maintenance, your vacanty rate, your property management, and cap ex.

Whatever is left over (minus your mortgage payment) is your cash flow.

How to find a rental off-market for best ROI

Why go off market?

First off, let’s decode what “off-market” really means. In the simplest terms, an off-market property is like that secret menu item at your favorite café. It’s not openly advertised or listed, making it exclusive to those in the know. And guess what? Just like that secret menu item, off-market deals can be absolute gems!

Now, to the juicy part: **How does going off-market amp up your ROI?** Well, my friend, it all boils down to one magic word: **negotiation**.

1. Less Competition = More Leverage: With fewer potential buyers eyeballing the property, you’ve got a stronger bargaining chip. Sellers might be more willing to negotiate, especially if they’re keen on a quick, fuss-free sale. That means you can often snag properties below market value. Ka-ching!

2. Get the Insider Scoop: Since off-market properties aren’t in the public eye, sellers might be more candid about the reasons they’re selling. This transparency can arm you with insights, helping you make a better-informed—and often lower—offer.

3. Build Relationships for Future Deals: Engaging directly with sellers or their representatives can lead to fruitful, lasting relationships. This network can give you a heads-up on future off-market opportunities, ensuring you get first dibs on potential ROI goldmines.

4. Customize Your Deal: With less formal red tape, you might find sellers more open to creative financing or terms that favor your investment strategy. This flexibility can lead to more favorable deals that boost your ROI even further.

In a nutshell, by seeking out off-market opportunities, you’re positioning yourself in a prime spot to negotiate discounts. And as any seasoned investor will tell you, the purchase price is where you make your money. Buy low, rent smart, and watch your ROI soar!

So, next time you’re pondering about “how to calculate the ROI on rental properties”, don’t just crunch numbers. Consider the strategy behind the purchase. Going off-market might just be the ROI rocket fuel you’ve been searching for.

A Guide for finding the best ROI on rentals:

You know, those sneaky, under-the-radar properties that aren’t splashed all over mainstream listings. Yep, that’s the gold we’re digging for and will give you the best ROI on your money.

But how exactly do you unearth these hidden gems?

Well here’s a list:

1. Direct Mail Campaigns:
Sending targeted letters or postcards to homeowners in desired neighborhoods can be effective. You can segment your list based on criteria like property age, equity amount, or owner’s length of residence.

2. Driving for Dollars:
This old-school method involves driving around neighborhoods, looking for properties that seem vacant or in disrepair, and then approaching the owners directly.

NOTE: the number best affordable app that helps you do this is the Deal Machine App.

3. Networking:
Building relationships with local real estate agents, attorneys, property managers, and even other investors can lead to off-market opportunities. Real estate investment groups and clubs are also great places to network.

4. Wholesalers:
Wholesalers often find and secure off-market properties, then sell their rights to the property to investors for a fee. Partnering with reputable wholesalers can be a win-win.

5. Online Marketing:
Websites, targeted ads, and social media campaigns can help attract motivated sellers. Platforms like Carrot offer website templates optimized for real estate investors.

6. Public Records:
Check records for pre-foreclosures, probates, or properties with unpaid taxes. These can be gold mines for off-market deals.

7. Landlords and Property Managers:
Some landlords might be tired of managing their properties and might be willing to sell. Property managers might also have insights into which landlords might be looking to offload properties.

8. Real Estate Auctions:
While not entirely “off-market,” properties at auctions are not always listed traditionally and can be acquired below market value.

9. Cold Calling and Texting:
Using tools like Batch Lead, you can reach out directly to homeowners. This method can be time-consuming but fruitful with persistence and the right approach.

10.Use a CRM:
Tools like Investor Fuse and RealeFlow help manage and nurture potential leads. They can be essential in ensuring no opportunity slips through the cracks.

(Check out our top list of CRMs for investors)

11. Skiptracing:
If you spot a property but can’t find the owner’s details, skiptracing tools can provide the necessary contact information.

12. Local Classifieds and Bulletin Boards:
Sometimes, landlords will list properties in local newspapers or community boards before going to major listing sites.

13. Word of Mouth:
Simply letting friends, family, and acquaintances know that you’re in the market can lead to unexpected opportunities.

14. Real Estate Bird Dogs:
These are individuals who scout out properties for investors in exchange for a fee. They can be especially helpful if they’re familiar with the local real estate scene.

15. Expired and Withdrawn MLS Listings:
Properties that didn’t sell or were pulled from the market might still be available, and the owners might be willing to negotiate.

Remember, finding off-market rentals requires a combination of persistence, creativity, and strategy. With the right methods and a proactive approach, you can uncover some truly great deals.

(NOTE: Propstream is a great tool for pulling this list)

In Conclusion: The Interplay of ROI and Rentals

Navigating the world of real estate and rental properties can often feel like a challenging puzzle. However, the core of making successful investments always circles back to understanding and maximizing your Return on Investment (ROI). This vital metric, which is the percentage of net profit relative to the cost of the investment, serves as a compass for investors to gauge the profitability and potential success of their rental properties.

But it’s not just about crunching numbers. To truly optimize ROI, savvy investors tap into strategic approaches for sourcing properties, particularly off-market deals. By leveraging techniques ranging from direct mail campaigns to digital platforms and CRMs like Investor Fuse and RealeFlow, investors can uncover hidden gems in the market. Moreover, tools such as Carrot empower them to build a robust online presence, while skiptracing, Batch Leads, and other resources enhance outreach efforts. In essence, combining the art of sourcing with the science of ROI calculation creates a potent formula for success.

So, whether you’re an established property magnate or just dipping your toes into the rental realm, always circle back to ROI. It’s the North Star guiding your decisions, ensuring that every investment move is not just a roll of the dice, but a calculated step toward building wealth and prosperity.


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