How to Calculate True ROI on Your Rental Property
For the first few years I owned rentals, I kept comparing my returns to the S&P 500 and feeling like an idiot. My cash flow worked out to maybe 4% on the money I'd put in.
The index was doing 10%. Why was I dealing with leaky pipes and late rent for less than half the return?
The problem wasn't my properties. It was that I was only counting one of the four ways rental real estate actually makes money.
Once I ran the full ROI calculation, that "4% return" turned out to be closer to 24%. I'd been missing three of the four return sources the whole time.
This is how you calculate the real number.
The four ways rental properties make money
Cash flow is the most visible return, but usually the smallest. Real estate wealth comes from four sources running at the same time.
1. Cash flow
What lands in your account each month after rent minus all expenses and mortgage. In 2026, with investment property rates around 7%, many well-bought properties show modest cash flow or even break-even in year one. That's not automatically a bad deal.
2. Appreciation (the levered kind)
This is where the math gets interesting. When you put $50,000 down on a $200,000 property and it appreciates 3%, the property gained $6,000 in value.
Your $50,000 earned $6,000. That's a 12% return on your cash, not a 3% return on the property price.
You own 100% of the appreciation on an asset you only partially paid for. The bank's portion appreciates too, but you keep all of it.
3. Principal paydown
Every mortgage payment your tenant's rent covers is buying you more of the building. On a $150,000 loan in year one, roughly $1,500 goes to principal. That equity doesn't show up in your bank account, but it's real wealth building quietly in the background.
4. Tax savings from depreciation
The IRS lets you write off the building's value over 27.5 years, even while it's appreciating. On a $160,000 building, that's about $5,800 per year in paper losses offsetting your rental income.
In the 24% bracket, that's roughly $1,400 in real tax savings annually.
Screen deals fast before you run the full numbers
Before spending an hour on a spreadsheet, run any property through two quick filters. They'll tell you in under a minute whether it's worth your time.
The 1% rule
Monthly rent should equal at least 1% of the purchase price. A $200,000 property needs $2,000/month in rent to pass. In competitive markets, 0.8% is sometimes acceptable. Anything below that usually means cash flow will be a struggle no matter how you finance it.
The 50% rule
Assume roughly half your gross rent goes to operating expenses: taxes, insurance, maintenance, vacancy, and reserves. The other half needs to cover your mortgage and leave something for you. If it doesn't, you're subsidizing your tenant's housing.
The core metrics: what to calculate on every deal
Once a property passes the quick filters, these are the numbers that actually tell you whether to buy.
| Metric | Formula | What it tells you |
|---|---|---|
| Net operating income (NOI) | Gross rent – operating expenses | Earning power before debt. The foundation for every other metric. |
| Cash flow | NOI – mortgage payment | What actually lands in your account each month |
| Cash-on-cash return | Annual cash flow / total cash invested | How hard your down payment is working relative to other investments |
| Cap rate | NOI / purchase price | The property's yield before financing, without the effect of debt. Useful for comparing deals across markets. |
See our full breakdown of cap rate and what makes a good one by market. For target ROI ranges across all four metrics, see what is a good ROI on rental property.
A real deal, all four numbers: Indianapolis, 2026
Theory is one thing. Here's what it looks like on an actual property at current rates.
$200,000 single-family in Indianapolis. Rent: $1,700/month. 25% down ($50,000), $3,000 closing costs. $53,000 total cash in. Mortgage: $150,000 at 7%, 30 years ($998/month).
The operating expenses
| Expense | Monthly | Annual |
|---|---|---|
| Property taxes | $167 | $2,000 |
| Insurance | $100 | $1,200 |
| Maintenance (1% of value) | $167 | $2,000 |
| Vacancy reserve (5%) | $85 | $1,020 |
| CapEx reserve (5%) | $85 | $1,020 |
| Total operating | $604 | $7,240 |
NOI = $20,400 – $7,240 = $13,160 Cash flow = $13,160 – $11,976 = $1,184/year ($99/month) Cash-on-cash return = $1,184 / $53,000 = 2.2%
On cash flow alone, this looks weak. A 2.2% cash-on-cash return barely beats a high-yield savings account.
Now run all four return sources.
The true ROI picture
| Return source | Year 1 | Return on $53K |
|---|---|---|
| Cash flow | $1,185 | 2.2% |
| Appreciation (3%, levered) | $6,000 | 11.3% |
| Principal paydown | $1,524 | 2.9% |
| Tax savings (depreciation) | $1,396 | 2.6% |
| Total | $10,105 | 19.1% |
A deal that looked like a 2.2% return is actually delivering 19.1% when you count everything. Comparing cash flow alone to the S&P 500 is the wrong calculation. It leaves out three of the four things driving the return.
Know when to walk away: the $285K example
Not every deal deserves the full analysis. Run the quick filters first.
$285,000 property, $2,100/month rent. Quick 1% check: $2,100 / $285,000 = 0.74%. That's below the 0.8% floor, which means debt service is going to eat the margin before you even look at expenses.
NOI (after operating costs): ~$12,468/year Annual mortgage at 7%: $17,064/year Annual cash flow: -$4,596 Cash-on-cash return: -5.8%
Walk away. Could appreciation bail this out over a decade? Maybe. But you'd be betting, not investing. The numbers have to work at current rates, not rates you wish existed.
What good ROI looks like in 2026
With investment property mortgage rates around 7–8%, cash flow margins are tight across most markets. Single-family rental yields averaged 7.45% in 2025, down from 7.52% in 2024.
The national cap rate hit 5.04% in September 2025 across $41 billion in sales, according to CBRE's Cap Rate Survey. In this environment, thin year-one cash flow doesn't automatically mean a bad deal.
It means appreciation and equity buildup are carrying more of the return weight, which is fine as long as you're buying in a market with real demand and a reasonable outlook for price growth.
Cash-flow-focused investors should look at secondary Midwest and Southeast markets where the 0.8–1% rule is still achievable. In major coastal metros, appreciation does most of the heavy lifting. A 3–5% cash-on-cash against 10–15% total ROI is common for well-bought properties.
For a deeper look at cap rate ranges by market, see five methods for valuing a rental property.
Mistakes that skew your numbers
Lowballing expenses. The "minor repair" that becomes a $6,000 HVAC replacement is the most common budget-killer. Budget maintenance at 1–1.5% of property value annually, and hold a separate CapEx reserve for roofs, water heaters, and appliances.
If you're not sure how much to hold in reserve, see how much cash landlords should keep on hand.
Using purchase price, not total cash invested. Your cash-on-cash return is measured against what left your bank account: down payment, closing costs, and any upfront repairs. Not your total equity in the property.
Calculating against the wrong denominator makes weak deals look better than they are.
Comparing unlevered real estate to unlevered stocks. When you put 25% down on a property, you're using 4-to-1 financial advantage on the appreciation portion. The S&P 500 comparison is only apples-to-apples if you're buying real estate all-cash.
Most people aren't. Run the levered numbers.
Banking on aggressive appreciation. 3% annual growth is a reasonable long-run assumption in most markets. Don't underwrite 8% because your market was hot last year.
If a deal only works at 8% appreciation, it's a bet, not an investment.
Forgetting depreciation recapture on exit. When you sell, the IRS recaptures a portion of the depreciation you claimed. Factor that into your exit math when projecting IRR.
Your CPA can model this before you list. It changes the net proceeds number meaningfully.
Know your actual numbers, not just estimates
Running the analysis before you buy is the easy part. The harder part is knowing what your current properties are actually returning after you own them, month by month, property by property.
Most landlords with two or more properties find tracking starts to break down fast. Receipts pile up. Repairs get paid from the wrong account.
By tax season, the estimate and the reality are rarely the same number.
FourCasa's Property Evaluator calculates NOI, cash flow, cash-on-cash, and cap rate automatically for any property you're evaluating. Connect your bank account, and Casey, FourCasa's AI, categorizes income and expenses throughout the year so your four return sources are tracked in real time, not approximated in April.
If you want to see what your current properties are actually returning, start a free 14-day trial. No credit card required. Your next deal will be much easier to evaluate once you have a real baseline from the ones you already own.
