How do you calculate ROI on a rental property?

What return on investment means on a rental

ROI stands for return on investment. On a rental, it divides the cash the house returns in a year by the cash you put in.

Net operating income is the rent left after vacancy and operating costs, before any loan payment. Cash flow is what is left after the loan payments.

It takes 4 inputs.

• Rent: Take 12 months of a verified rent, less vacancy.
• Operating costs: Count management, property tax, insurance and maintenance.
• Loan payments: Price 12 months of payments if you borrow.
• Cash you put in: Count the down payment, closing costs and any repairs before the first tenant.

The year 1 figure leaves out appreciation and the principal you repay.

A real example from a Homesage.ai report

We pulled the report figures for a single-family house in Indianapolis, Indiana. It carries a condition score of Good.

Verified rent here means the rent advertised on a recent rental listing for this house, checked in our listing data. No lease stands behind it.

The estimated current value is within $295 of the list price, so we run the math at $180,000. The table works the return 2 ways, bought for cash and with 20% down.

Vacancy uses the 7.3% national rate for Q2 2026 from the US Census Bureau. Management uses 10%, the middle of the 8% to 12% that Forbes Advisor reports.

Indiana caps the tax on a rental house at 2% of its gross assessed value, according to the state's Department of Local Government Finance. We charge the full cap on the price.

NerdWallet puts Indiana insurance at $1,760 a year for $200,000 of dwelling coverage. Landlord policies cost about 25% more, according to the Insurance Information Institute. That puts this house at $2,200.

Fannie Mae's maintenance guide suggests 1% to 4% of value a year, more for homes over 30 years old. This house is over 30 years old but scores Good, so we use 2%. For closing costs we use 3%, inside the 2% to 5% range from Freddie Mac.

Bought for cash, you put in $185,400 and keep $6,319 a year. That is an estimated ROI of 3.4%.

Fannie Mae's Eligibility Matrix allows 15% down on a 1-unit investment property. Its Selling Guide requires mortgage insurance above 80% of value, so we use 20% down. You put in $41,400 and borrow $144,000.

The loan payments of $11,823 a year are larger than the $6,319 the house nets. Cash flow turns into a loss of $5,504, an estimated ROI of minus 13.3%. Counting the $1,386 of principal you repay in year 1, it is still minus 9.9%.

Bought for cash, this house returns an estimated 3.4% a year. Borrow at 7.28% and the same house loses $459 a month.

How to calculate ROI on rental property

1. Verify the rent. Use a verified rent or 3 to 5 comparable rentals, as our guide to setting an asking rent explains.
2. Subtract operating costs line by line. Count vacancy, management and property tax, then insurance and maintenance. Leave the loan out.
3. Subtract 12 months of loan payments if you borrow. Price them from a lender quote for an investment property.
4. Add up the cash you put in. Count the down payment, closing costs and any repairs before the first tenant.
5. Divide the year's cash flow by the cash you put in. The result is your return for year 1.

Cap rate uses the same lines but stops before the loan. It divides net operating income by the price, 3.5% on this house, and our guide to what a good cap rate is covers the benchmarks. Cash-on-cash return is the financed return without the principal you repay, explained in our guide to a good cash-on-cash return.

What changes the return on a rental

The rent moves the result most. Past rent listings for this house ranged from $1,200 to $1,725. At $1,200, the estimated ROI for a cash buyer falls to 1.4%.

The rate decides whether a loan helps. Freddie Mac's survey tracks owner-occupied loans with 20% down, and lenders usually charge more for an investment loan. Get a quote before you count on 7.28%.

At 7.28% and 20% down, this house needs about $2,139 a month in rent to break even. That is 35% above the verified rent.

Common rental return mistakes to avoid

• Leaving out vacancy: On our Indianapolis example, vacancy costs $1,388 a year. Leave it out and the cash buyer's estimated ROI reads 4.2% instead of 3.4%.
• Using a rate you were never quoted: Freddie Mac's 7.28% tracks owner-occupied loans, and investment loans usually cost more. Price the loan from a lender quote, because this house already loses $5,504 a year at 7.28%.
• Treating one rent as a sure thing: A verified rent is one advertised rent, and past listings for this house ranged from $1,200 to $1,725. Check 3 to 5 comparable rentals, because at $1,200 the cash buyer's estimated ROI falls to 1.4%.
• Pricing upkeep from photos alone: A condition score comes from photos, which cannot show the wiring or plumbing of an older house. Get an inspection, because at 4% maintenance the cash buyer's estimated ROI falls to 1.5%.

Estimated values. Not investment advice. Data as of 2026-10-04.

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