How do you know if your rental property is truly making you money? As a landlord, your goal isn’t just to own property—it’s to make a profitable investment.

Calculating your return on investment (ROI) helps you understand whether your property is a financial win or if adjustments are needed.

In this article, Sun-Pro Realty and Management will break down the essential steps for accurately calculating ROI and how you can use it to guide smarter investment decisions.

Get in Touch!

What is ROI in Real Estate and Why Does It Matter?

Understanding ROI for Landlords

ROI (Return on Investment) is the most critical metric for determining whether your rental property is profitable. It shows how much profit you’re earning compared to your initial investment.

A high ROI indicates a successful investment, while a low ROI suggests you may need to rethink your strategy.

Why ROI Is Important for Landlords:

  • Compare Properties: ROI lets you compare properties to determine which is the best investment.
  • Guide Financial Decisions: Knowing your ROI helps you decide whether to hold, sell, or improve a property.
  • Avoid Financial Pitfalls: A low ROI highlights hidden costs eating into your profits.

The Key Formula: How to Calculate ROI on a Rental Property

The Basic ROI Formula

ROI is calculated with this simple formula:

ROI = (Annual Net Profit ÷ Total Investment) × 100

Where:

Annual Net Profit = Total rental income minus all expenses (mortgage, taxes, repairs, etc.)
Total Investment = The total amount spent on purchasing and improving the property.

For example, if you bought a property for $200,000 and spent $10,000 on upgrades, your total investment is $210,000. If your net profit is $15,000, your ROI would be:

($15,000 ÷ $210,000) × 100 = 7.1% ROI

What’s Considered a Good ROI?

  • Above 10%: Excellent investment
  • 5-10%: Decent return
  • Below 5%: May need adjustments to improve profitability

Factoring in All Costs: What Expenses Should Landlords Consider?

Many landlords only look at mortgage payments when calculating ROI, but to get an accurate picture, you must consider all costs associated with owning a rental property.

One-Time Costs (Paid Once):

  • Down payment: The amount paid when purchasing the property.
  • Closing costs: Fees for legal and administrative expenses.
  • Renovations: Initial upgrades to make the property rental-ready.

Ongoing Costs (Paid Regularly):

  • Mortgage payments.
  • Property taxes.
  • Insurance.
  • Maintenance and repairs.
  • Vacancy costs.
  • Property management fees (if applicable).

Cash Purchase vs. Financed Purchase: How It Affects ROI?

Cash Purchase: Pros & Cons

Buying with cash avoids mortgage payments, but limits growth potential.

  • Pros: Higher monthly profits, no lender fees, lower risk.
  • Cons: Slower portfolio growth as all cash is tied up in one property.

Financed Purchase: Pros & Cons

Most landlords finance properties, which affects ROI differently.

  • Pros: Leverage to buy more properties, tax benefits from mortgage interest.
  • Cons: Lower monthly profits, risk of rising interest rates.

How Financing Affects ROI Calculation

When using a mortgage, the cash-on-cash ROI formula is more accurate:

Cash-on-Cash ROI = (Annual Net Profit ÷ Cash Invested) × 100

For example, if you invested $50,000 in a $200,000 property with a $5,000 annual net profit, your cash-on-cash ROI would be:

($5,000 ÷ $50,000) × 100 = 10% Cash-on-Cash ROI

This shows that financing can actually boost your ROI, even though your total earnings are lower.

The Impact of Rental Income on ROI

Why Rental Income Matters

Rental income forms the backbone of your ROI. The higher your rental income relative to expenses, the better your ROI.

However, factors like location, property type, and market demand can cause income to fluctuate.

How to Set the Right Rental Price

  • Market Research: Compare similar properties in your area to determine the right rent.
  • Demand & Supply: High demand means you can charge more, boosting ROI.
  • Property Condition: Well-maintained properties attract higher-paying tenants.

Avoiding Common Pitfalls

  • Overpricing can lead to vacancies, hurting ROI.
  • Underpricing leaves money on the table, reducing your return.
  • Frequent turnovers can disrupt cash flow due to repair and marketing costs.

How Property Appreciation Affects ROI

Understanding Appreciation

In addition to rental income, property appreciation increases the value of your property over time. For example, a property bought for $200,000 could be worth $250,000 in five years, boosting your ROI.

Factors That Influence Appreciation

  • Location Growth: Properties in growing cities or neighborhoods appreciate faster.
  • Infrastructure and Amenities: Nearby schools, hospitals, and transport hubs add value.
  • Market Conditions: A strong real estate market drives higher appreciation rates.

How to Factor Appreciation into ROI

To include appreciation, modify the formula as follows:

Total ROI = (Annual Net Profit + Property Value Increase) ÷ Total Investment × 100

For example, if your property increases in value by $20,000 and you earn $10,000 annually in rental income, your total ROI would be much higher.

The Role of Property Management in ROI

Self-Managing vs. Hiring a Property Manager

Choosing between self-managing or hiring a property manager impacts ROI.

  • Self-Managing: Saves money but requires significant time and effort.
  • Hiring a Property Manager: Costs 8-12% of rental income but can reduce workload.

How Property Management Affects ROI

  • Lower Maintenance Costs: Professional managers often get repairs at lower rates.
  • Faster Resident Placement: An experienced manager can reduce vacancy periods.
  • Legal Compliance: Property managers ensure compliance, avoiding fines and disputes.

Hiring a property manager may seem like an extra cost, but it can improve ROI by reducing vacancies and maintenance issues.

How to Improve Your ROI Over Time

Increasing Rental Income:

  • Upgrade the property with modern fixtures or new appliances to justify higher rent.
  • Offer additional services (e.g., laundry, parking, or storage) for extra income.
  • Screen residents carefully to reduce turnover costs.

Reducing Expenses:

  • Regular maintenance can prevent costly repairs down the road.
  • Install energy-efficient appliances to lower utility costs.
  • Consider refinancing loans if interest rates drop to reduce mortgage payments.

Reevaluating Your Investment Strategy:

  • If a property consistently underperforms, consider selling and reinvesting elsewhere.
  • Diversifying your portfolio spreads risk and increases profit potential.

Maximize Your ROI with Expert Guidance

Calculating ROI is just the beginning, maximizing it requires smart decisions and proactive management.

Sun-Pro Realty and Management can help optimize your investment strategy by handling everything from rent setting to maintenance and ensuring higher occupancy rates.

If you're ready to boost your ROI, reach out to Sun-Pro Realty and Management for expert property management services tailored to your needs.

Contact Us Today!