How Do You Calculate ROI on a Rental Property?
Use two measures. Cash-on-cash return divides your annual cash flow by the cash you invested, which shows how the property performs against your original investment. Return on equity divides your total annual return by your current equity, which shows how hard your capital is working today and signals when it may be time to reposition.
Written by Kyle Vaillancourt, Licensed Florida Real Estate Broker, Providence Property Management. Last reviewed: September 2026.
How do you calculate cash-on-cash return?
Divide your annual cash flow by the total cash you invested. Here's a year-one example on a $400,000 property.
Cash invested:
| Item | Amount |
|---|---|
| Down payment (20%) | $80,000 |
| Closing costs (3%) | $12,000 |
| Reserves (six months) | $15,000 |
| Total cash invested | $107,000 |
Annual cash flow:
| Item | Monthly | Annual |
|---|---|---|
| Rent | $3,000 | $36,000 |
| Mortgage payment, taxes, and insurance (PITI) | $2,500 | $30,000 |
| Management and maintenance | $400 | $4,800 |
| Cash flow | $1,200 |
Cash-on-cash return = $1,200 ÷ $107,000 = 1.12%.
That may not sound exciting, but it only measures cash flow. It ignores appreciation, loan paydown, and tax benefits.
How do you calculate return on equity?
Divide your total annual return by your current equity. Here's the same property after 10 years:
- At 4% average annual appreciation, the $400,000 property is worth about $592,000.
- Loan paydown has reduced the mortgage from $320,000 to about $260,000.
- Your equity is now $592,000 – $260,000 = $332,000. Your original $107,000 has grown into $332,000 in equity.
Now look forward one year:
| Return | Annual amount |
|---|---|
| Appreciation ($592,000 × 4%) | $23,680 |
| Principal paydown | About $6,000 |
| Cash flow (improved by rent growth) | About $3,000 |
| Total annual return | $32,680 |
Return on equity = $32,680 ÷ $332,000 = 9.8% on your current equity.
Your equity has grown substantially, but your return on that equity may now be lower than what you could earn by redeploying it.
When does it make sense to reposition equity?
Suppose you sell the property for $592,000:
| Item | Amount |
|---|---|
| Sale price | $592,000 |
| 6% commission | – $35,520 |
| 3% closing costs | – $17,760 |
| Mortgage payoff | – $260,000 |
| Net cash | About $278,720 |
Using 20% down payments ($100,000 each) on two $500,000 properties, plus 3% closing costs on each ($15,000 each), you'd need about $230,000 to buy both, leaving about $48,700 in reserve capital.
Now, instead of one property appreciating at 4%, you have two. Instead of one loan being paid down, you have two. Instead of one depreciation schedule, you have two. You've amplified appreciation, loan paydown, and depreciation while keeping cash flow positive. Under the same assumptions, your equity position over the next 10 years, including the cash flow you receive, could reach roughly $910,000.
Why does understanding ROI matter?
Cash-on-cash return tells you how the property performs against your original investment. Return on equity tells you how your capital is performing today. Tracking both helps you decide when to hold and when to reposition.
If you'd like help calculating these numbers for your own property, we're happy to walk through them with you at no cost. And if repositioning your equity makes sense, we also offer full brokerage services to help you sell strategically and reinvest in high-performing properties.
The bottom line
Real estate performance isn't just about owning property. It's about optimizing your capital.
Related: What Are the Four Ways a Rental Property Makes Money? · What Are the Biggest Tax Advantages of Rental Real Estate?
Have a question about your own property?
Talk With Our Team