Rental Property ROI Calculator

Set the appreciation assumption to 0% and the year-one return falls from 17.2% to 7.4% — $3,841 of cash flow plus $2,118 of principal on $80,875. That is still a real return, and it is the one that does not depend on the market doing anything.

It is worth running both. A deal that only clears your hurdle with 3% appreciation baked in is a directional bet; a deal that clears it at zero is an income asset that also happens to be exposed to house prices.

How do you calculate ROI on a rental property?

Add the four ways the property pays you in a year — cash flow, loan principal paid down, appreciation, and the tax saved by depreciation — then divide by the cash you invested. On the example here that is $3,841 + $2,118 + $7,950 over $80,875, which is 17.2% before the tax shield and about 19.6% with it.

Why is ROI so much higher than cash on cash return?

Because cash-on-cash counts only one of the four components. On this deal cash flow is $3,841 of a $13,909 total year-one return; the other 72% arrives as equity rather than as money in your account. Both numbers are correct — they answer different questions, and only one of them pays your bills.

Should appreciation be counted in ROI?

Only if you label it as an assumption, because it is the one component you do not control. At 3% a year it is the largest single line in the return above, so a deal that only works with appreciation is a bet on the market rather than an investment in a building. Set appreciation to zero in the calculator and see whether the deal still stands up.

What return does the depreciation shield add?

Depreciation is a paper deduction that shelters real income. The example deal has a $277,200 cost basis — the $265,000 price plus $4,200 of capitalised closing costs and the $8,000 of improvements — and at 20% land value that leaves $221,760 depreciable, or $8,064 a year over 27.5 years. At a 24% marginal rate that saves about $1,935 of tax: a further 2.4 percentage points of return on $80,875, and none of it costs you anything in cash.

Is ROI the same as IRR?

No. ROI as calculated here is a single-year snapshot. IRR accounts for when each dollar arrives across the whole hold and includes the sale, so a deal with a large payday in year ten has a lower IRR than the same payday in year three. The projection on the real estate investment calculator page shows the IRR at every possible exit year.

For the cash component alone, see the cash on cash return calculator. For the full hold period with IRR and equity multiple at each exit year, use the real estate investment calculator, and for the tax shield in detail the rental property depreciation calculator.