A quick way to put a return on a rental is to divide a year’s cash flow by the cash you put in. That’s the cash-on-cash return, and on the house below it’s 8.8%. It’s a real figure, but it counts only one of the ways a rental pays you, and none of what it costs to sell.
What goes into ROI on a rental property?
ROI, or return on investment, is your profit divided by the cash you put in. The cash you put in is the down payment, the closing costs and any work before the first tenant. The profit comes in four pieces, and one of them is a cost:
- Cash flow: the rent left each month after every running cost and the mortgage payment. This line-by-line example shows how to build it.
- Loan paydown: the part of each payment that lowers what you owe. It’s yours, but you can’t spend it until you sell or refinance.
- Growth: any rise in the house’s value while you own it.
- Selling costs: agents’ commissions and closing costs on the sale, taken out of the price.
The down payment isn’t a cost. It stays yours, as your share of the house, and comes back out of the sale. The closing costs you paid to buy are spent, so they count against the profit too.
How do you calculate ROI on a rental with a mortgage?
With a mortgage, the investment is only your own cash, and the loan shows up in two more places: its payment comes out of cash flow, and the part that paid down the balance comes back when you sell.
Take the house the rental calculator opens with: $250,000, bought with 20% down on a 30-year loan at 7%, plus 3% in closing costs. That’s $57,500 of your cash. It rents for $2,750 a month. After empty months, taxes, insurance, repairs, money set aside for big repairs, management and the $1,331 mortgage payment, it keeps $420 a month in its first year. Of that first payment, $1,167 is interest and $164 pays down the loan.
Now hold it five years and sell. The example assumes rent and costs rise 2% a year, the house’s value rises 3% a year, and selling takes 7% of the sale price.
| Over five years | |
|---|---|
| Cash flow, years 1 to 5 | +$29,500 |
| Loan paid down | +$11,737 |
| Growth in value, 3% a year | +$39,819 |
| Selling costs, 7% of the $289,819 sale price | −$20,287 |
| Closing costs paid to buy | −$7,500 |
| Profit | +$53,269 |
These are example figures, not a forecast for any market.
Divide the $53,269 profit by the $57,500 you put in, and the house returns 92.6% over five years.
All of these figures are before income tax. On a sale, your gain is measured from the house’s basis, which usually starts as what you paid (IRS Publication 544). Depreciation, the yearly tax deduction for part of a rental’s cost, lowers that basis, including any you could have taken and didn’t (Publication 527). A lower basis means a bigger gain. Ask a tax professional what a sale would owe.
Why isn’t the yearly return 92.6% divided by five?
Dividing a five-year ROI by five treats the money as if it arrived evenly, which would make 92.6% look like 18.5% a year. Most of it arrives at the end, with the sale, and a dollar in five years is worth less than one today, because today’s dollar could be earning in the meantime.
The measure that counts the timing is the internal rate of return, or IRR. For this house it’s 16.0% a year. Picture $57,500 in an account paying 16.0% a year. Take out each year’s cash flow as the house pays it, then the sale money at the end of year five, and the account hits zero right then.
The hold changes the answer a lot, because buying and selling costs are paid once, however long you keep the house.
| Profit | ROI, whole hold | IRR, per year | |
|---|---|---|---|
| Sold after 1 year | −$10,951 | −19.0% | −19.0% |
| Sold after 2 years | +$3,875 | 6.7% | 3.5% |
| Sold after 5 years | +$53,269 | 92.6% | 16.0% |
| Sold after 10 years | +$153,717 | 267.3% | 17.5% |
Sell after one year and the house loses $10,951, though it paid you every month. Its first year earned $14,574 in cash flow, paydown and growth, while buying and selling cost $25,525. By the end of year two it’s ahead, and the longer it’s held, the less those one-time costs weigh on each year’s return.
Is a rental property a good investment?
Whether a rental is a good investment turns on which of the four pieces you can count on, and on this house they carry very different weight.
Cash flow and loan paydown come from the rent. Over five years they add up to $41,237 here, enough to cover the $27,787 it costs to buy and sell, with $13,450 to spare. For how much bad luck that cash flow can absorb along the way, see how much a rental should cash flow.
Growth is the example’s assumption, and it’s $39,819 of the $53,269, three-quarters of the profit. If prices stay flat, the five-year profit falls to $16,237 and the IRR to 6.1%. Sold after three years, the house would still be $2,057 behind. It first comes out ahead in year four.
For scale, the Federal Housing Finance Agency’s index shows U.S. house prices up 2.1% in the year to the second quarter of 2026, and rising in 76 of the 100 largest metro areas (FHFA, August 25, 2026). At 2.1% a year, this house’s five-year IRR would be 13.3%. The Consumer Price Index’s rent measure rose 2.7% in the 12 months to August 2026 (BLS, September 11, 2026), a little above the example’s 2% a year.
So for any rental, two numbers are worth finding: how much of the return depends on prices rising, and how many years the rent alone needs to cover the cost of buying and selling.
How do you work out ROI on a house you’re looking at?
The rental calculator and a saved property split the work between them.
- Run the house in the rental calculator. Its cash-on-cash return is the first year’s ROI from cash flow alone, measured against the cash invested.
- Save the property, then open its Inputs tab. Under Growth assumptions, put in your own rates for the value, the rent and the costs, your selling costs, and a hold period of five years. A saved property starts with a 30-year hold, where this house shows 15.5%.
- Read the IRR on the Analysis tab. With a five-year hold, the line “Return over 5 years (IRR)” shows it.
- Set “Appreciation / yr” to 0 and read it again. The gap between the two is how much of the return depends on prices rising.