How to Calculate Rental Property ROI (and What Good Looks Like)
Rental property returns are not one number — they are at least three. Here is how to calculate each one and what the results actually mean.
Why you need more than one number
When someone says a rental property "makes 8%," you should always ask: 8% of what, and before or after which expenses? Three different investors can look at the same property and quote three different returns — and all of them can be mathematically correct.
The numbers that matter are gross yield, net yield, and cash-on-cash return. Each answers a different question. Knowing all three gives you a complete picture of what a deal actually delivers.
The core formulas
Gross yield = (Annual rental income / Property value) × 100
Net yield = ((Annual rental income − Annual expenses) / Property value) × 100
Cash-on-cash ROI = (Annual pre-tax cash flow / Total cash invested) × 100
Worked example
Let us walk through a real scenario.
Property details:
| Item | Value |
|---|---|
| Purchase price | 200,000 |
| Monthly rent | 1,500 |
| Annual rental income | 18,000 |
| Annual operating expenses | 4,800 |
| Mortgage payment (monthly) | 900 |
| Down payment paid | 40,000 |
Step 1 — Gross yield
Gross yield = (18,000 / 200,000) × 100 = 9%
A gross yield of 9% looks strong. But gross yield ignores every cost of running the property, so it is really just the starting point.
Step 2 — Net yield
Annual operating expenses of 4,800 include: property management (1,800), maintenance/repairs (1,200), insurance (900), property taxes (600), accounting (300).
Net yield = ((18,000 − 4,800) / 200,000) × 100
= (13,200 / 200,000) × 100
= 6.6%
Already a different picture. The 9% headline becomes 6.6% after costs — and this still does not factor in the mortgage.
Step 3 — Cash-on-cash return
Now we bring in the financing. The annual mortgage payments are 900 × 12 = 10,800.
Annual cash flow = Net operating income − Mortgage payments
= 13,200 − 10,800
= 2,400
Cash-on-cash ROI = (2,400 / 40,000) × 100 = 6%
You invested 40,000 of your own cash (the down payment) and received 2,400 in annual cash flow. That is a 6% cash-on-cash return. Use the rental property calculator to model this for any property scenario, or the ROI calculator for a broader investment comparison.
How vacancy and maintenance affect the numbers
The worked example above assumes every month is rented and nothing breaks. Reality is messier.
Vacancy allowance: Budget 5–8% of annual rent as a vacancy allowance even if your current tenant is reliable. One month vacant per year reduces income by 8.3%.
| Vacancy rate | Effective annual income (from 18,000) |
|---|---|
| 0% (fully occupied) | 18,000 |
| 5% | 17,100 |
| 8% | 16,560 |
| 12% | 15,840 |
Maintenance reserves: Older properties or those with ageing systems (roofing, plumbing, HVAC) typically require 1–1.5% of property value per year in maintenance. On a 200,000 property, budget 2,000–3,000 annually. A surprise roof replacement or plumbing failure can wipe out a year's cash flow in a single invoice.
When you rerun the example with a 6% vacancy allowance (−1,080) and 1% maintenance reserve (−2,000), your annual cash flow drops from 2,400 to roughly −680 — a negative cash flow despite a 9% gross yield. Stress-testing your numbers before you buy is not pessimism; it is how serious investors avoid expensive surprises.
What separates a good deal from a mediocre one
There is no universal threshold — returns vary enormously by market, asset class, and economic cycle. That said, here are useful benchmarks:
| Metric | Weak | Reasonable | Strong |
|---|---|---|---|
| Gross yield | Below 4% | 5–7% | Above 8% |
| Net yield | Below 2.5% | 3.5–5.5% | Above 6% |
| Cash-on-cash | Below 3% | 4–7% | Above 8% |
The quality checklist beyond the numbers:
- Is the rental market growing or contracting in this area?
- What is the typical tenant quality and turnover rate?
- Are comparable rents rising, flat, or falling?
- What capital improvements will be required in the next 5 years?
- Does the gross yield justify the management burden compared to passive alternatives?
A property with a 5% net yield in a city with strong employment and population growth may ultimately outperform a 9% gross yield property in a declining regional town — because capital appreciation forms part of the total return.
For a broader framework on evaluating property investments, the guide on cap rate in real estate covers how that metric fits into the picture alongside yield.
Key takeaways
- Gross yield tells you the income potential; net yield tells you what is left after running costs; cash-on-cash return tells you how your actual invested capital performs.
- A property that looks attractive at gross yield can become marginal or negative once vacancy, maintenance, and financing costs are applied — always model all three metrics.
- Strong returns are contextual: a lower yield in a high-growth market can deliver better total returns than a higher yield in a stagnant one.
Figures are illustrative estimates. Consult a licensed mortgage or financial advisor for advice specific to your situation.
Frequently asked questions
What is a good rental yield?+
This varies by market, but a gross yield of 6–8% is often cited as reasonable in many urban markets. Net yields of 4–6% after expenses are considered solid. Markets with higher growth potential often accept lower yields; higher-yield properties in slower-growth areas trade off appreciation for income. Always compare against local benchmarks, not global averages.
How does vacancy affect my returns?+
Vacancy directly reduces gross income. A property vacant for one month per year has an effective occupancy rate of about 92%, which cuts your annual rental income by roughly 8%. Most experienced investors budget for 5–10% vacancy even in strong rental markets, because maintenance, tenant turnover, and seasonal gaps are normal.
Should I calculate ROI before or after financing?+
Both — and they tell you different things. Cash-on-cash return measures the income from your actual cash invested (including mortgage payments), which tells you how efficiently your own money is working. Cap rate and gross/net yield ignore financing, giving you a property-level comparison that is independent of how you structured the deal.
What expenses should I include in a net yield calculation?+
Common property expenses include: property management fees (typically 8–12% of rent), maintenance and repairs, insurance, property taxes, accounting/legal, vacancy allowance, and any body corporate or HOA fees. Mortgage principal and interest are financing costs — they belong in cash-on-cash return, not in the net yield calculation.
Is a high ROI always better?+
Not necessarily. Very high yields often signal higher risk — lower-quality tenants, higher vacancy, more maintenance, or a market with weak capital growth. A property earning 10% gross yield in a declining area may deliver worse total returns than a 5% yield property in a growing city. Total return includes both income and capital appreciation.
Try the calculators
Keep reading
- What Is Cap Rate in Real Estate Investing?
Cap rate is the one number investors use to size up a rental at a glance — here’s how to calculate it and where it misleads.
- Rent vs Buy: Which Is Right for You?
Whether buying beats renting comes down to how long you’ll stay — here’s how to find your break-even and weigh the parts a spreadsheet can’t.
- How Much House Can I Afford?
Your income sets a budget, but your debts, down payment, and interest rate decide the actual price tag — here is how they fit together.
David writes about borrowing without the jargon, after years of helping friends and family decode loan paperwork. He believes everyone deserves to understand what they’re signing.