ANALYSIS

How to Calculate ROI on a Rental Property

Updated March 2026

Total ROI Has Four Parts

Most people only calculate one: cash flow. But rental property ROI comes from four sources working simultaneously. Cash flow (rent minus all expenses minus mortgage). Mortgage payoff (your tenant is paying down your loan — that's return on your investment). Appreciation (property values increasing over time). Tax benefits (depreciation shelter, deductions). A property with \$200/month cash flow looks mediocre. Add \$250/month in mortgage payoff, \$400/month in appreciation, and \$150/month in tax savings, and your total return is \$1,000/month.

Calculating Each Component

Cash flow: annual rent minus vacancy minus operating expenses minus mortgage. Mortgage payoff: check your amortization schedule for year 1 principal payments (typically \$2,500-4,000 on a \$150K loan). Appreciation: use conservative 2-3% annually (your market may differ). Tax benefits: depreciation deduction times your marginal tax rate. Add all four and divide by your total cash invested.

A Real Example

\$180K property, \$45K down, renting for \$1,400/month. Cash flow after all expenses: \$2,400/yr. Mortgage principal payoff year 1: \$2,800. Appreciation at 3%: \$5,400. Tax savings from depreciation: \$1,400. Total return: \$12,000/yr on \$45K invested = 26.7% total ROI. The cash-on-cash alone was only 5.3%. Most investors would pass on that 5.3% without seeing the full picture.

Don't Cherry-Pick

It's tempting to only highlight the components that look good. A negative cash flow property in Nashville might show 20% total ROI when you project 5% appreciation. But appreciation isn't guaranteed — it's a bet. Cash flow is certain (or not). Weight cash flow and mortgage payoff more heavily because they're predictable. Appreciation and tax benefits are the bonus.