Meet our newest tool, the Rental Property Return on Investment (ROI) Calculator! This tool considers all factors influencing your annual cash flow to help determine a property’s potential and set a rent price to turn the profit you want.
What is Return on Investment?
Return on investment, or ROI, is a calculation of your property’s profit as a percentage of the cost of your investment. This percentage determines if your investment was profitable—the higher the ROI, the higher your profit.
What factors does ROI consider?
When calculating ROI, it’s important to account for all costs, not just the initial purchase price. In addition to the purchase price, an ROI calculation for a rental property should include a down payment, property loan, loan interest rate, loan term, closing costs, and any monthly recurring expenses like insurance, property taxes, and maintenance.
What Is the ROI Calculator?
There are a lot of moving parts in the financial aspect of property management, but the ROI calculator does the heavy lifting for you.
How to use the ROI calculator
Gather your expense data and fill in the numbers on the ROI calculator line by line. The ROI calculator does all the math for you, summarizing your profit after one, five, 15, and 30 years. This helps you assess whether your property is a good long-term investment.
In the main section, input basic information such as your down payment, loan amount, loan interest rate, and monthly rental income.
Expand the “Advanced Options” section to input monthly costs like maintenance, insurance, or loan payment and your annual rent increase.
On the results summary, you’ll see six different metrics:
- Annual cash flow
- Capitalization rate
- Cash-on-cash ROI
- Net operating income (NOI)
- Initial investment
- Gross rent multiplier (GRM)
Annual cash flow
Annual cash flow refers to your net profit after all expenses are paid. This is your total take-home pay.
Capitalization rate
Capitalization rate, or cap rate, calculates net operating income as a percentage of the property value. Cap rate differs from ROI because it calculates the current return, while ROI calculates the return over a certain period of time.
Unlike ROI, a low cap rate doesn’t necessarily mean a bad investment. The cap rate is negatively correlated with the amount of time it would take to see a return on your investment—a high cap rate indicates a better short-term investment, while a low cap rate indicates a better long-term investment. Most investors advise to aim for a cap rate between 5-10%.
The capitalization rate will only appear on the first year’s results summary.
Cash-on-cash ROI
Cash-on-cash ROI compares your annual profit as a percentage of your initial investment. This is your yearly return on investment, while a general ROI will show your total return.
Net operating income (NOI)
NOI refers to the net revenue after operating expenses are paid. This differs from your annual cash flow because it does not include loan payments in the expenses, while annual cash flow does include loan payments. NOI helps determine if the property will be able to cover its operating costs before loan payments.
Initial investment
The initial investment is all the money you spent upfront. This includes your down payment, closing costs, and any renovation costs. The initial investment will only appear on the first year’s results summary.
Gross rent multiplier (GRM)
The gross rent multiplier, or GRM, is a quick way to compare investment properties by calculating the ratio of the property price to your gross annual rental income. The lower the GRM, the better, but most investors suggest aiming for a GRM between 4 and 7. The GRM will only appear on the first year’s results summary.
Why Is ROI Important?
Calculating a property’s ROI can help property managers make informed investment decisions, evaluate their property’s performance, and set or adjust their property’s rent price.
Investment decision-making
It's important to consider a property’s ROI before acquiring it to determine if it’s worth your money. If a property you’re considering has a low ROI, you may be better off investing your money elsewhere. If your property’s ROI keeps declining, selling the property may be the best choice before you lose money.
Assessing performance
Regularly monitoring a property’s ROI allows property managers to assess their property’s performance. Catching a decline in ROI early on allows landlords to make renovations or adjust the rent price to avoid losing money.
Setting or adjusting a rent price
Calculating your property’s ROI is also helpful when setting or reevaluating your rent price. While a low rent price will attract renters, you risk setting it too low and losing money if you don’t calculate your ROI.
How Can Rental Tools Help?
Rental Tools is a one-stop shop for property managers. With Rental Tools, you can:
- List your property and reach millions of renters
- Screen potential tenants to find the best renter
- Create a lease agreement specific to your state’s laws
- Collect rent online and receive payments securely
- Track income and expenses to manage your finances
- Organize maintenance requests and make your and your tenant’s lives easier
- View Rent Comp reports to determine a fair rent price for your property
Listing your property with Apartments.com means streamlining your role as a property manager and making your job easier, allowing you to focus on making your property a great place for your tenants to live.
