Calculating the Return on Investment (ROI) for an investment property is crucial for property investors looking to evaluate the profitability and ROI of their investment ventures.
So, understanding how to accurately assess ROI allows investors to make informed decisions, whether they are considering new purchases or managing existing properties.
This article will guide you through the process of calculating ROI, breaking down each step and providing clear formulas to ensure you have the tools necessary to maximize your investment potential.
Download the Buy to let property investment ROI and rental property ROI calculator (Google Sheet):
Table of Contents
What is property investment ROI?
Property Investment ROI (Return on Investment) is a financial metric used to evaluate the profitability of real estate investments.
It measures the return generated from an investment relative to its cost, expressed as a percentage.
The ROI calculation takes into account various factors, including rental income, operating expenses, and the purchase price of the property.
A higher ROI indicates a more profitable investment, making it a crucial tool for investors to assess potential returns and make informed decisions about property acquisition and management.
The formula to calculate ROI on investment property
To effectively assess the profitability of an investment property, the ROI formula is essential. It is expressed as:
ROI%= ((R×12) × (1−0.08)) − (P×0.01 + ((R×12) × (1−0.08)) × 0.10 + P × 0.005) P×100
Key Elements:
- R: Monthly Rent, which is multiplied by 12 to calculate annual income.
- P: Purchase Price of the property.
- 0.08: Represents an assumed vacancy rate of 8%.
- Operating Expenses: Includes maintenance (1% of P), management fees (10% of EGI), and insurance (0.5% of P).
This formula provides a comprehensive view of the property’s financial performance, accounting for income and expenses to determine the ROI percentage.
How to calculate ROI in Buy-to-Let property investment?
Before diving into the calculations, it’s crucial to familiarize yourself with some key terms:
- Monthly Rent (R): The income generated from renting the property each month.
- Purchase Price (P): The total cost paid to acquire the property.
- Annual Gross Rent (AGR): Total rental income over a year before any expenses are deducted.
- Effective Gross Income (EGI): Total rental income adjusted for potential vacancy losses.
- Net Operating Income (NOI): The income remaining after deducting operating expenses from EGI.
- Return on Investment (ROI): A measure of the profitability of an investment expressed as a percentage.
Here’s the formula to calculate ROI in buy-to-let investment:
ROI%= ((R×12) × (1−0.08)) − (P×0.01 + ((R×12) × (1−0.08)) × 0.10 + P × 0.005) P×100
Let’s get into the step-by-step explanation for calculating the ROI.
Step 1: Collect basic input variables
The first step in calculating ROI is to gather the necessary input variables:
- Identify Monthly Rent (R): Determine the monthly rent charged for the property.
- Determine Purchase Price (P): Record the total purchase price of the property, ensuring all costs associated with the purchase are included.
Step 2: Calculate annual gross rental income
To find out how much income you can expect from your property over a year, calculate the Annual Gross Rent (AGR):
Formula:
- Annual Gross Rent AGR =Monthly Rent R ×12
- Annual Gross Rent AGR =Monthly Rent R ×12
Example: If your monthly rent (R) is $1,000:
- AGR=1,000×12=$12,000
- AGR=1,000×12=$12,000
Step 3: Calculate effective gross income (EGI)
Next, you need to account for potential income loss due to vacancies. This is where Effective Gross Income (EGI) comes into play:
- Assume a Vacancy Rate: A standard vacancy rate is often set at 8%.
Formula:
- Effective Gross Income EGI =Annual Gross Rent AGR × (1−Vacancy Rate)
- Effective Gross Income EGI =Annual Gross Rent AGR × (1−Vacancy Rate)
Example:
- EGI=12,000×(1−0.08)=12,000×0.92=$11,040
- EGI=12,000×(1−0.08)=12,000×0.92=$11,040
Step 4: Breakdown operating expenses
Understanding your operating expenses is crucial for determining your net income. Here’s how to break down these costs:
a) Maintenance Costs
Formula:
- Annual Maintenance=Purchase Price P ×0.01
- Annual Maintenance=Purchase Price P ×0.01
Example: If your purchase price (P) is $200,000:
- M=200,000×0.01=$2,000
- M=200,000×0.01=$2,000
b) Property Management Fees
Formula:
- Management Fee MF =Effective Gross Income EGI ×0.10
- Management Fee MF =Effective Gross Income EGI ×0.10
Example:
- MF=11,040×0.10=$1,104
- MF=11,040×0.10=$1,104
c) Insurance Costs
Formula:
- Annual Insurance=Purchase Price P ×0.005
- Annual Insurance=Purchase Price P ×0.005
Example:
- I=200,000×0.005=$1,000
- I=200,000×0.005=$1,000
d) Total Operating Expenses
Now that you have calculated individual operating expenses, sum them up:
Formula:
- Total Operating Expenses TOE =M+MF+I
- Total Operating Expenses TOE =M+MF+I
Example:
- TOE=$2,000+$1,104+$1,000=$4,104
- TOE=$2,000+$1,104+$1,000=$4,104
Step 5: Calculate net operating income (NOI)
With your total operating expenses calculated, you can now determine your Net Operating Income:
Formula:
- Net Operating Income NOI =Effective Gross Income EGI −Total Operating Expenses TOE
- Net Operating Income NOI =Effective Gross Income EGI −Total Operating Expenses TOE
Example:
- NOI=$11,040−$4,104=$6,936
- NOI=$11,040−$4,104=$6,936
Step 6: Calculate return on investment (ROI) percentage
Finally, it’s time to calculate your ROI percentage to assess the profitability of your investment:
ROI%= (Net Operating Income (NOI)/ Purchase Price (P) )×100
Assume, If P is $200,000:
ROI%= ($6,936/$200,000) × 100 ≈ 3.47%
For those who prefer a quick reference for calculations, here’s a combined formula that encapsulates all steps:
ROI%= [((R×12) × (1−0.08)) − (P×0.01 + ((R×12) × (1−0.08)) × 0.10 + P×0.005)] ÷ P × 100
- P: This stands for the Purchase Price of the property. It is the total amount paid to acquire the property and serves as a basis for calculating both operating expenses and the ROI.
- R: This represents the Monthly Rent collected from tenants. It is used to calculate the Annual Gross Rental Income and subsequently affects the Effective Gross Income and Net Operating Income.
Step 7: ROI classification
To evaluate performance based on your calculated ROI percentage, use the following classifications:
- ROI <5%: Below target performance (Red)
- ROI between 5% and ≤7%: Acceptable performance (Yellow)
- ROI >7%: Good performance (Green)
To help you understand the ROI and profitability of your buy-to-let property investment, I have created the following table with sample purchase price and monthly rent.
| Purchase Price | $500 Monthly Rent | $600 Monthly Rent | $700 Monthly Rent | $800 Monthly Rent | $900 Monthly Rent | $1000 Monthly Rent | $1100 Monthly Rent | $1200 Monthly Rent |
| $100,000 Est. costs: $1500/yr | 3.5% Net income: $3468 | 4.5% Net income: $4462 | 5.5% Net income: $5455 | 6.4% Net income: $6449 | 7.4% Net income: $7442 | 8.4% Net income: $8436 | 9.4% Net income: $9430 | 10.4% Net income: $10423 |
| $125,000 Est. costs: $1875/yr | 2.5% Net income: $3093 | 3.3% Net income: $4087 | 4.1% Net income: $5080 | 4.9% Net income: $6074 | 5.7% Net income: $7067 | 6.4% Net income: $8061 | 7.2% Net income: $9055 | 8.0% Net income: $10048 |
| $150,000 Est. costs: $2250/yr | 1.8% Net income: $2718 | 2.5% Net income: $3712 | 3.1% Net income: $4705 | 3.8% Net income: $5699 | 4.5% Net income: $6692 | 5.1% Net income: $7686 | 5.8% Net income: $8680 | 6.4% Net income: $9673 |
| $175,000 Est. costs: $2625/yr | 1.3% Net income: $2343 | 1.9% Net income: $3337 | 2.5% Net income: $4330 | 3.0% Net income: $5324 | 3.6% Net income: $6317 | 4.2% Net income: $7311 | 4.7% Net income: $8305 | 5.3% Net income: $9298 |
| $200,000 Est. costs: $3000/yr | 1.0% Net income: $1968 | 1.5% Net income: $2962 | 2.0% Net income: $3955 | 2.5% Net income: $4949 | 3.0% Net income: $5942 | 3.5% Net income: $6936 | 4.0% Net income: $7930 | 4.5% Net income: $8923 |
| $225,000 Est. costs: $3375/yr | 0.7% Net income: $1593 | 1.1% Net income: $2587 | 1.6% Net income: $3580 | 2.0% Net income: $4574 | 2.5% Net income: $5567 | 2.9% Net income: $6561 | 3.4% Net income: $7555 | 3.8% Net income: $8548 |
| $250,000 Est. costs: $3750/yr | 0.5% Net income: $1218 | 0.9% Net income: $2212 | 1.3% Net income: $3205 | 1.7% Net income: $4199 | 2.1% Net income: $5192 | 2.5% Net income: $6186 | 2.9% Net income: $7180 | 3.3% Net income: $8173 |
| $275,000 Est. costs: $4125/yr | 0.3% Net income: $843 | 0.7% Net income: $1837 | 1.0% Net income: $2830 | 1.4% Net income: $3824 | 1.8% Net income: $4817 | 2.1% Net income: $5811 | 2.5% Net income: $6805 | 2.8% Net income: $7798 |
| $300,000 Est. costs: $4500/yr | 0.2% Net income: $468 | 0.5% Net income: $1462 | 0.8% Net income: $2455 | 1.1% Net income: $3449 | 1.5% Net income: $4442 | 1.8% Net income: $5436 | 2.1% Net income: $6430 | 2.5% Net income: $7423 |
| $325,000 Est. costs: $4875/yr | 0.0% Net income: $93 | 0.3% Net income: $1087 | 0.6% Net income: $2080 | 0.9% Net income: $3074 | 1.3% Net income: $4067 | 1.6% Net income: $5061 | 1.9% Net income: $6055 | 2.2% Net income: $7048 |
| $350,000 Est. costs: $5250/yr | -0.1% Net income: $-282 | 0.2% Net income: $712 | 0.5% Net income: $1705 | 0.8% Net income: $2699 | 1.1% Net income: $3692 | 1.3% Net income: $4686 | 1.6% Net income: $5680 | 1.9% Net income: $6673 |
| $375,000 Est. costs: $5625/yr | -0.2% Net income: $-657 | 0.1% Net income: $337 | 0.4% Net income: $1330 | 0.6% Net income: $2324 | 0.9% Net income: $3317 | 1.1% Net income: $4311 | 1.4% Net income: $5305 | 1.7% Net income: $6298 |
| $400,000 Est. costs: $6000/yr | -0.3% Net income: $-1032 | -0.0% Net income: $-38 | 0.2% Net income: $955 | 0.5% Net income: $1949 | 0.7% Net income: $2942 | 1.0% Net income: $3936 | 1.2% Net income: $4930 | 1.5% Net income: $5923 |
| $425,000 Est. costs: $6375/yr | -0.3% Net income: $-1407 | -0.1% Net income: $-413 | 0.1% Net income: $580 | 0.4% Net income: $1574 | 0.6% Net income: $2567 | 0.8% Net income: $3561 | 1.1% Net income: $4555 | 1.3% Net income: $5548 |
| $450,000 Est. costs: $6750/yr | -0.4% Net income: $-1782 | -0.2% Net income: $-788 | 0.0% Net income: $205 | 0.3% Net income: $1199 | 0.5% Net income: $2192 | 0.7% Net income: $3186 | 0.9% Net income: $4180 | 1.1% Net income: $5173 |
How to calculate ROI in rental property?
The most straightforward way to calculate rental property ROI is the Simple ROI method:
1. Simple ROI (Basic Method)
Simple ROI = (Annual Rental Income ÷ Total Investment) × 100
Example:
- Property Cost: $200,000
- Annual Rent: $24,000
ROI = ($24,000 ÷ $200,000) × 100 = 12%
Related guide: Is rent to rent legal in the UK?
2. Cash-on-Cash Return (for Mortgaged Properties)
The Cash-on-Cash Return method is particularly useful for properties purchased with a mortgage. It focuses on the cash flow generated relative to the cash invested.
Cash-on-Cash ROI = (Annual Cash Flow ÷ Total Cash Invested) × 100
Where:
- Annual Cash Flow = Net Operating Income – Mortgage Payments
- Total Cash Invested = Down Payment + Closing Costs + Repair Costs
Example:
- Down Payment: $40,000 (20% of $200,000)
- Closing Costs: $4,000
- Repairs: $6,000
- Total Investment: $50,000
- Annual Cash Flow: $5,000
- Cash-on-Cash ROI = ($5,000 ÷ $50,000) × 100 = 10%
Related guide: Investment property loans (beginners’ guide for propert investors)
3. Capitalization Rate (Cap Rate)
The Capitalization Rate (Cap Rate) is a key metric used in property investment to evaluate the potential return on a property.
It provides insight into how effectively a property generates income relative to its market value.
The Cap Rate offers insight into the property’s potential return based on its net operating income relative to its value.
Cap Rate = (Net Operating Income ÷ Property Value) × 100
Where:
- Net Operating Income (NOI) = Annual Rental Income – Operating Expenses
Example:
- Annual Rent: $24,000
- Operating Expenses: $9,000
- NOI: $15,000
- Property Value: $200,000
- Cap Rate = ($15,000 ÷ $200,000) × 100 = 7.5%
4. Total ROI (including all returns)
The Total ROI method accounts for all returns from a property investment, including cash flow, equity buildup, and appreciation.
Total ROI in rental property = [(Annual Cash Flow + Equity Buildup + Appreciation) ÷ Total Investment] × 100
Here’s an example:
- Annual Cash Flow: $5,000
- Equity Buildup: $4,000
- Appreciation: $6,000
- Total Investment: $50,000
Total ROI = [($5,000 + $4,000 + $6,000) ÷ $50,000] × 100 = 30%
Property ROI Calculations: Cash vs Mortgage Purchase
The key difference in property ROI calculations between a cash purchase and a mortgage purchase lies in the way the investment is financed and how returns are measured:
Cash Purchase ROI:
- The entire property is bought upfront with cash.
- ROI focuses on cash flow (rental income minus expenses) and any appreciation.
- The return is typically lower since no leverage is used, but it carries less risk and no loan costs.
Mortgage Purchase ROI:
- The property is financed with a loan (leverage), requiring a smaller down payment.
- ROI considers cash flow, loan principal paydown (equity buildup), and appreciation.
- Returns can be higher due to leverage, but risks increase with debt, and loan costs reduce cash flow.
ROI example with and without mortgage
1. Cash Purchase (No Mortgage)
In a cash purchase (no mortgage) scenario, the investor buys the property outright without taking on any debt. This method has several advantages and disadvantages.
Initial rental investment
- Purchase Price: This is the total cost of acquiring the property. For example, if the property purchase price is $300,000.
- Closing Costs: Typically around 2% of the purchase price, which in this case would be $6,000.
- Initial Repairs: Any necessary repairs before renting out the property, say $9,000.
- Total Cash Investment: This sums up to $315,000.
Annual rental income
- Gross Annual Rent: If the monthly rental income is $2,500, then the annual rental income would be $30,000.
- Less Vacancy: Assuming an 8% vacancy rate, the effective gross income (EGI) would be calculated as follows:
- EGI=Gross Annual Rent−(Gross Annual Rent×Vacancy Rate)=30,000−(30,000×0.08)=27,600
- EGI=Gross Annual Rent−(Gross Annual Rent×Vacancy Rate)=30,000−(30,000×0.08)=27,600
Annual expenses (assumptions):
- Property Tax (1.5%): $4,500
- Insurance: $1,500
- Maintenance (1%): $3,000
- Property Management (10%): $2,760
- Total Expenses: Adding these gives a total of $11,760.
To find the Net Operating Income (NOI):
NOI = EGI−Total Expenses = 27,600−11,760 =15,840
NOI = EGI−Total Expenses = 27,600−11,760 =15,840
The ROI can then be calculated as:
ROI on rental property = (NOI/Total Cash Investment)×100 = (15,840/315,000) × 100 ≈ 5.03%
2. Mortgage Purchase (Financed)
In contrast to a cash purchase, a mortgage purchase involves financing part of the property cost through a loan. This method allows investors to leverage their capital but also introduces additional risks.
Initial Investment
- Down Payment (20%): For a property priced at $300,000, this amounts to $60,000.
- Closing Costs: Similar to the cash purchase at $6,000.
- Initial Repairs: Again assuming $9,000.
- Total Cash Investment: This totals to $75,000.
Mortgage Details
- Loan Amount: The remaining balance after the down payment is $240,000.
- Interest Rate: Assuming a rate of 6.5% over a 30-year term results in monthly payments of approximately $1,517 and annual payments of about $18,204.
Annual Income and Expenses
The annual income remains the same as in the cash purchase scenario:
- Gross Annual Rent: $30,000
- Less Vacancy: Effective Gross Income of $27,600.
Annual expenses also remain consistent:
- Total Expenses including mortgage payments would now be:
Total Expenses = Property Tax + Insurance + Maintenance + Property Management + Mortgage Payments
Calculating this gives:
Total Expenses = 4,500 + 1,500 + 3,000 + 2,760 + 18,204 = 29,964
Mortgage Purchase ROI Calculations
1. Cash-on-Cash Return
First calculate annual cash flow:
Annual Cash Flow = EGI−Total Expenses = 27,600 − 29,964 = −2,364
Then calculate Cash-on-Cash ROI:
Cash on Cash ROI = (−2,364 / 75,000) × 100 = −3.15%
2. Total ROI (Including Equity & Appreciation)
Consider equity buildup from mortgage payments and property appreciation:
- Annual Principal Paydown: Approximately $4,800.
- Property Appreciation (assumed at 3%): About $9,000.
- Total Return calculation:
Total Return = −2,364+4,800+9,000=11,436
Total Return = −2,364+4,800+9,000 =11,436
Finally calculate Total ROI: Total ROI = (11,43675,000)×100 = 15.25%
Comparison between ROI on rental property with mortgage and without mortgage
When evaluating property investments, understanding the difference between cash and mortgage purchases is crucial.
A cash purchase allows investors to avoid debt, resulting in immediate positive cash flow and lower risk, but it requires significant upfront capital and ties up funds in the property.
Conversely, a mortgage purchase enables leveraging capital, potentially leading to higher overall returns, but introduces risks such as monthly payments that can initially result in negative cash flow.
| Metric | Cash Purchase | Mortgage Purchase |
| Simple ROI | 5.03% | N/A |
| Cash-on-Cash ROI | N/A | -3.15% |
| Total ROI | N/A | 15.25% |
| Monthly Cash Flow | +$1,320 | -$197 |
| Total Investment | $315,000 | $75,000 |
What is a good ROI for property investors?
A good Return on Investment (ROI) for property investors typically ranges from 5% to 10%.
An ROI below 5% is often considered underperforming, while an ROI above 7% is seen as favorable. For buy-to-let properties, an ROI of 8% or more is generally regarded as strong, indicating a healthy investment return.
Factors that affect the ROI and profitability of your property investment are:
- Property Location
- Market conditions
- Individual investment strategies
So you need to assess their specific circumstances when evaluating potential returns.
How Pluxa property helps you find the best property deals in the UK
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Here are related services as offered at Pluxa Property:
- Rent To Serviced Accommodation Business Plan (R2SA)
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- Best Buy-to-Let Invest area In UK
Peter Juhasz is the founder of Pluxa Property, the biggest property investment company in UK and Group CEO of AIP Capital Group and a property investment expert with over a decade of experience in the UK market.
He built a successful property company using innovative cashflow strategies like Serviced Accommodation and HMOs, scaling to 200 units in four years.
Peter leads a team specializing in property and business acquisitions across various sectors. A former co-host of “Cashflow With Property,” he shares his expertise in real estate investing and business scaling.
He is committed to continuous learning and helping SME owners and investors maximize their returns, driven by his passion for empowering others to achieve their financial goals.
To learn how Pluxa Property can help you in UK property investment, contact our experts.
