A good ROI for rental property is typically 8-12% annually. This varies by market, property type, and financing. Compare against alternative investments to determine if the return justifies the risk.
ROI = (Annual Return / Total Investment) ร 100. Annual return includes rental income minus expenses plus appreciation. Total investment includes down payment, closing costs, and renovation costs.
Cap rate (capitalization rate) = Net Operating Income / Property Value. It measures return independent of financing. A 5-8% cap rate is typical for residential rental properties.
Include mortgage payments, property taxes, insurance, maintenance (1% of value/year), property management (8-10% of rent), vacancy allowance (5-10%), HOA fees, and capital expenditure reserves.
Use (using a mortgage) amplifies both gains and losses. A 20% down payment means a 5% property appreciation yields 25% return on your invested cash โ but losses are equally magnified.
Use cap rate to compare properties regardless of financing. Use cash-on-cash return to evaluate your actual return given your specific loan terms. Both are important for different decisions.