Real estate & rental
Rental ROI Calculator
Works return on a rental, where the denominator decides what the number means.
Result
Simple payback, with no discounting and no financing cost. For anything large or long, money now is worth more than money later and a lender will want interest, both of which make the real return lower than this.
Get a Free Business AuditHow the calculation works
The annual return divided by the amount invested, where both terms need defining: return may be cash flow alone or cash flow plus principal paydown and appreciation, and investment may be the purchase price or the cash actually committed. Four combinations exist and they produce very different percentages for the same property.
What moves the number
- Which return components are included.
- Whether the denominator is price or cash invested.
- Leverage, which changes the cash denominator.
- Whether the figure is pre-tax or after tax.
Where this one goes wrong
A return figure quoted without its definition is uninformative, and the range between the plausible definitions for a single property is wide enough to change a decision, which is why comparing a figure from one source against one from another is usually comparing nothing. Define both terms and keep them fixed. Cash flow only against cash invested is the most conservative and the most useful for judging whether a property pays its own way.
Before you quote
- Define both the return and the investment before quoting a figure.
- Keep the definition fixed when comparing properties.
- Calculate the cash-only version as well as the total.
Questions
About this calculator
Why do rental return figures vary so much?
Because both terms can be defined several ways: return may include appreciation and principal paydown or not, and investment may be price or cash committed. The range across definitions for one property is wide enough to change a decision.
Which definition should I use?
Whichever you keep consistent, and calculate the cash-only version too. Cash flow against cash invested is the most conservative and the most useful for judging whether a property pays its own way rather than requiring funding.
Can I compare a return figure from a listing against mine?
Only if you know how theirs was defined, which usually you do not. Recalculating from the underlying rent and expenses on your own definition is the only reliable comparison, and it frequently produces a lower number.
The formula
payback = cost / (monthly gain - monthly running cost)
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How to use this calculator
- Up-front cost ($). Enter your own figure; the page starts at $12,000.
- Extra gross profit per month ($). Enter your own figure; the page starts at $1,400.
- Extra running cost per month ($). Enter your own figure; the page starts at $220.
- Period to judge it over. Enter your own figure; the page starts at 36.
The result updates as you type, so you can try a figure, see what it does to payback period, and change it back. Nothing you enter is sent anywhere or saved.
A worked example
These are the figures the calculator opens with. Every number in the results column below is produced by the same calculation the page runs, so you can follow it through before putting your own figures in.
What goes in
| Input | Value |
|---|---|
| Up-front cost | $12,000 |
| Extra gross profit per month | $1,400 |
| Extra running cost per month | $220 |
| Period to judge it over | 36 |
What comes out
| Result | Value |
|---|---|
| Payback period main result | 10.2 |
| Net gain per month | $1,180 |
| Net return over the period | $30,480 |
| Return on investment | 254% |
It pays for itself in 10.2 months and returns $30,480 over 36 months, a 254% return.
How sensitive the answer is
Holding everything else steady and changing only up-front cost, this is what happens to payback period. It is worth knowing which of your inputs the answer actually hinges on, and which barely move it.
| Up-front cost ($) | Payback period |
|---|---|
| $6,000 | 5.1 |
| $9,000 | 7.6 |
| $12,000 example above | 10.2 |
| $18,000 | 15.3 |
| $24,000 | 20.3 |
Every other input is held at the example value while this one changes, which is not how a real job behaves. Treat it as a guide to which number matters most, not as five separate quotes.
What each figure means
- Up-front cost ($)
- A money amount, starting at $12,000.
- Extra gross profit per month ($)
- A money amount, starting at $1,400.
- Extra running cost per month ($)
- A money amount, starting at $220.
- Period to judge it over
- A number, between 0 and 240, starting at 36.
What the results tell you
| Result | What it is |
|---|---|
| Payback period | The headline result. A decimal figure. |
| Net gain per month | A money figure. |
| Net return over the period | A money figure. |
| Return on investment | A percentage. |
What is not in this number
Property figures here exclude the costs that decide whether a deal works: vacancy, maintenance, management, capital expenditure and the transaction costs at both ends. A return that looks strong before those frequently does not survive them.
Estimating is the easy part
The jobs you never hear about cost more than the ones you mis-measure. BDEVY builds the marketing, systems and automation that bring them in.