How to calculate rental property ROI
Cap rate and cash-on-cash return answer different questions, and a property can look strong on one while losing money every month on the other.
The short answer
There is no single rental ROI. Cap rate is net operating income divided by purchase price and ignores your mortgage; cash-on-cash return is annual cashflow divided by the cash you actually put in and includes it. Report both, alongside monthly cashflow, because a property can have a healthy cap rate and still be negative every month.
The formula
effective income = monthly rent x (1 - vacancy%)
operating expenses = tax + insurance + management + maintenance + HOA
NOI = (effective income - operating expenses) x 12
cap rate = NOI / purchase price
cashflow = effective income - operating expenses - mortgage payment
cash-on-cash = (cashflow x 12) / (down payment + closing + rehab)
The mortgage payment belongs in cashflow and cash-on-cash, never in NOI. Cap rate is a property measure — putting financing inside it makes two identical houses look like different investments because their owners borrowed differently.
Worked example
A $285,000 house, 20% down, $57,000 plus $8,550 closing and $6,000 of work. Rent $2,150, 6% vacancy, $6,700 of annual expenses, and a $1,458 monthly payment on the $228,000 balance:
effective income = 2,150 x 0.94 = 2,021
monthly expenses = 6,700 / 12 = 558
NOI = (2,021 - 558) x 12 = 17,556
cap rate = 17,556 / 285,000 = 6.2%
cashflow = 2,021 - 558 - 1,458 = 5
cash-on-cash = (5 x 12) / 71,550 = 0.1%
A 6.2% cap rate is a respectable number, and the property clears $5 a month. One vacancy, one boiler, one insurance rise and it is negative. Both figures are true; only one of them tells you what will land in your account.
Why cap rate and cash-on-cash disagree
Cap rate describes the building. Cash-on-cash describes your deal on the building. The gap between them is entirely financing — how much you borrowed, at what rate, over what term.
This is why cap rate is what people quote when comparing properties, and cash-on-cash is what they quote after they have bought one. Neither is wrong; quoting only the flattering one is.
The costs that get left out
Vacancy is the most commonly omitted, and the most expensive. A property empty one month in twelve is running at 92% and every per-month figure needs to reflect that before anything else is calculated.
Then capital expenditure: roofs, boilers, windows. These do not arrive monthly, so they rarely appear in a monthly model, and then they arrive all at once. Setting aside a fixed amount per month for them is the difference between a model and a forecast.
Management fees count even when you manage it yourself. Your time is not free, and if you ever stop, the cost becomes real without the rent changing.
What a good cap rate actually depends on
Cap rates are local. Six percent can be excellent in one market and poor in another, because the number reflects what buyers there will accept in exchange for the risk and the expected growth.
Comparing a cap rate against a national average tells you almost nothing. Comparing it against what similar buildings on similar streets sold for tells you a great deal.
What this leaves out
- Cashflow before tax. Depreciation, interest deductibility and local relief change the after-tax picture substantially and vary by country.
- No appreciation and no rent growth. Both are forecasts; this is arithmetic on today's numbers.
- A fixed mortgage payment. Variable-rate debt makes the cashflow line a range, not a number.
- Capital expenditure is only counted if you enter it. It is not estimated for you.
This arithmetic is free to run in your browser — no signup, nothing held back.
Open the free calculatorCommon questions
- Is cap rate or cash-on-cash return more important?
- Cap rate for comparing properties, cash-on-cash for judging your own deal. If you have to pick one to act on, cash-on-cash — but check monthly cashflow first, because a positive annual return built on a thin monthly margin is one repair from negative.
- Should the mortgage be in the cap rate?
- No. Cap rate measures the property independently of how it was financed. Including the mortgage would make the same building look like a different investment depending on the buyer's deposit, which defeats the purpose of the measure.
- What vacancy rate should I assume?
- Use what actually happens locally rather than a default. Five to eight percent is common for stable long-term lets, but a market with high turnover or seasonal demand can run far higher, and assuming zero is the fastest way to build a model that never happens.
Spreadsheets that do this
The formulas above, already built and checked — so you fill in your numbers rather than the arithmetic.
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Last reviewed 22 August 2026