How to Calculate Rental Property ROI (Cap Rate & Cash Flow)
5 min read
Before buying a rental, three numbers tell you most of what you need to know about the deal: cap rate, cash flow, and cash-on-cash return. Together they show whether a property actually makes money.
Here's what each one means and how to calculate it.
Step by step
- 1Calculate net operating income (NOI)
Take the annual rent and subtract operating expenses — property tax, insurance, maintenance, management, and a vacancy allowance — but not the mortgage. That's your NOI.
- 2Find the cap rate
Divide NOI by the purchase price. Cap rate lets you compare properties regardless of how they're financed; higher generally means more income per dollar of price.
- 3Calculate monthly cash flow
Subtract the mortgage payment from your monthly rent minus expenses. Positive cash flow means the property pays you each month; negative means it costs you.
- 4Measure cash-on-cash return
Divide your annual cash flow by the actual cash you invested (down payment plus closing costs). Use the Rental Property ROI Calculator to compute all three at once.
Tips
- Always budget for vacancy and maintenance — ignoring them is the most common way investors overestimate returns.
- A great cap rate with negative cash flow can still strain you month to month; check both.
- Compare the cash-on-cash return to what you'd earn investing the same cash elsewhere.
Frequently asked questions
What is a good cap rate for rental property?
It varies by market and risk, but many investors look for somewhere in the 5–10% range. Lower cap rates often reflect pricier, lower-risk areas; higher ones, more risk or work.
What's the difference between cap rate and cash-on-cash return?
Cap rate ignores financing (NOI ÷ price), so it compares properties fairly. Cash-on-cash return accounts for your loan and measures the return on the actual cash you put in.
How do I know if a rental will cash flow?
Subtract all expenses and the mortgage from the rent. If the result is positive, it cash flows. The calculator does this and also shows cap rate and cash-on-cash return.