How to Calculate Rental Property ROI
Whether it's planning for retirement, saving for life milestones like starting a family or a dream wedding, or simply seeking extra income, the aim of investing is consistent: financial growth.
In real estate, this growth can manifest in various ways over time. For instance, investing in residential rentals may target appreciation, equity growth, and cash flow. Alternatively, shorter-term gains can be pursued through strategies like BRRRR or fix and flips.
Regardless of the chosen strategy, savvy real estate investors assess profitability using Return on Investment (ROI). Understanding and mastering ROI calculation for rental properties is fundamental for making informed investment decisions in real estate.
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Key Takeaways
IN this article we will go over the following:
ROI Meaning and ROI Example
How to Calculate ROI, Return On Investment Formula
What is a good ROI for rental property?
Return On Investment calculators you can use.
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ROI Meaning and Example
ROI stands for Return on Investment. It's a financial metric used to evaluate the profitability of an investment whether it is stocks, mutual funds, or real estate. ROI is calculated by dividing the net profit from the investment by the total investment cost. Typically, this would be expressed in a percentage. It can help you assess a current or future investment.
The following is an example of a property I BRRR'd (buy, renovate, rent, refinance):
Purchase Price
The property cost me $205,000. I put down a down payment of 20% which came out to $41,000.
Additional Cost
There were $6000$ in closing costs and I put $90,000 in renovations. This brings the total initial investment up to $137,000
Annual Rental Income
This property generates $2,625/Month which comes out to $31,500/year.
Annual Expenses
After accounting for the mortgage, property taxes, insurance, maintenance, property management (I self manage this one), my annual expenses come out to $25,900.
Net Annual Income
Simply substract the Annual Income by the Annual expenses $31,500 - $25,900 = $5,600.
ROI Calculation
Plug the net annual income and the total investment into the ROI formula:
ROI =($5,600 / $137,000) x 100
ROI = 4.1%
This would not necessarily be considered a great return but in this case, it was a brrr deal and I refinanced and was able to pull out all of my initial investment minus approximately $10,000. If we use this number instead of the $137,000 initially investment this would mean I get a 56% return on investment.
How to Calculate ROI, Return On Investment Formula
The ROI formula is quite simple, you simply need to know your numbers invested and annual income. The formula is as follows:
ROI = (Net Annual Income / Total Investment) * 100
Net Annual Income - the total income minus all expenses
Total Investment - all money initially invested in the property such as down payment, closing cost, taxes, renovation costs, etc...
Check out my Resource Page for some of the top software to help you on your Real Estate Journey
What Is A Good ROI For Rental Property
Generally, a good ROI for a rental property would be 8-12%. Ultimately, what is considered a good ROI for a rental property depends on your investment strategy, risk tolerance, financial goals, and specific property characteristics.
Return On Investment Calculator
There are several great calculators out there to help you analyze your properties and most will include ROI calculations. The following are some of the my favorite calculators:
DealCheck
DealCheck is a great real estate investment analysis platform that allows users to quickly analyze rental properties, flips, brrr deals, and commercial buildings. It provides detailed reports on ROI, cash flow, cap rate, and more.
Rentometer
Rentometer is a tool that helps landlords and property managers determine the best rent for their rental properties. While it primarily focuses on rent analysis, it can also be used to calculate ROI.
Zillow Rental Manager
Zillow Rental Manager offers many tools for landlords, including a rental property calculator. While it's not as robust as DealCheck, it provides basic ROI calculations and insights into rental property performance.
Mashvisor
Mashvisor is a real estate data analytics platform that offers various tools for real estate investors, including a rental property calculator. It provides insights into cash flow, cap rate, and other ROI metrics.
BiggerPockets Rental Property Calculator
BiggerPockets is a popular online community for real estate investors, and their rental property calculator is a valuable tool for analyzing investment properties. It offers detailed calculations for cash flow, ROI, and other important metrics.
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Outro
In conclusion, investing in real estate offers multiple avenues for financial growth, whether it's through long-term appreciation, equity growth, or short-term gains from strategies like BRRRR or fix and flips. Regardless of the chosen approach, understanding and mastering Return on Investment (ROI) calculations is crucial for making informed decisions. Remember to subscribe for more insightful articles and check out the resources mentioned for assistance on your real estate journey.
Check out my Resource Page for some of the top software to help you on your Real Estate Journey
FAQ
What is the ROI model for a rental property?
The ROI model for a rental property is:
ROI = (Net Annual Income / Total Investment) * 100
Net Annual Income - the total income minus all expenses
Total Investment - all money initially invested in the property such as down payment, closing cost, taxes, renovation costs, etc...
How Is Return on Investment (ROI) Used?
Return on Investment is used to evaluate investment profitability, measure investment performance, guide decision-making, assess risk, and allocate resources efficiently.
How do I calculate ROI on rental property in Excel?
To calculate ROI on a rental property in Excel, use the following formula:
ROI = (Net Annual Income / Total Investment) * 100
Here is the step by step guide:
In cell A1, label it as "Net Income."
In cell A2, enter the total income generated by the property annually.
In cell B1, label it as "Total Investment."
In cell B2, enter the total amount of money invested in the property.
In cell C1, label it as "ROI."
In cell C2, enter the following formula: =(A2/B2)*100
This formula will calculate the ROI as a percentage. Adjust the cell references if your data is in different cells.
How do you calculate ROI on an investment?
To Calculate the ROI you would use the following steps
Subtract the initial investment from the final value to find the net profit.
Divide the net profit by the total investment.
Multiply the result by 100 to get the ROI as a percentage.
Is a 7% return on investment good?
A 7% return on investment is an average return and is considered a good investment. According to smartasset.com a normal ROI is between 5%-7%.