Rental property ROI, explained
Rental ROI is your total annual return divided by the cash you put in. The return has three engines: cash flow, loan principal paid down, and appreciation. A commonly cited "good" range is 8% to 12%, though financed and all-cash deals differ.
Cash-on-cash return tells you what lands in your pocket, but it quietly undersells a rental. Real estate pays you in more ways than monthly cash, and rental ROI adds them all up.
The three engines of return
- Cash flow: rent left after every expense and the mortgage. The part you can spend.
- Loan paydown: each payment chips at the principal. Your tenant slowly buys the property for you.
- Appreciation: if value rises, the gain is yours, amplified by leverage because you put down only a fraction.
A worked example
A deal throws off $1,200 of annual cash flow, you pay down $3,800 of principal in year one, and the property appreciates 3% on a $350,000 value, about $10,500. Against $98,000 of cash invested:
The same deal looked like a thin 1.2% on cash flow alone. Paydown and appreciation are the difference between "barely worth it" and "strong."
What is a good rental ROI?
| Scenario | Common "good" range |
|---|---|
| Overall | 8% to 12% |
| Financed (leveraged) | 7% to 10% |
| All-cash purchase | 5% to 6% |
Why ROI can flatter a deal
Two engines are reliable: cash flow and paydown come from the loan math and happen no matter what. Appreciation does not. In the example above it is two-thirds of the return. Treat appreciation as the optimistic part, lower it to a conservative number, and confirm the deal still makes sense without it.
Frequently asked questions
What is a good ROI on a rental property?
A commonly cited good range is 8% to 12%. Financed properties often land at 7% to 10%, and all-cash purchases nearer 5% to 6% because they use no leverage. A 5% return can be excellent in a stable market and poor in a fast-appreciating one.
What is the difference between ROI, cap rate and cash-on-cash?
Cap rate is the unleveraged property yield. Cash-on-cash is your year-one cash return on invested cash. ROI is the umbrella metric that can add loan paydown and appreciation on top, so it is usually the highest of the three.
Should ROI include appreciation?
Total-return ROI does, but appreciation is an assumption, not a guarantee. Always check that the deal still works on cash flow and paydown alone before you rely on it.
What costs go into total cash invested?
Your down payment, closing costs (typically 2% to 5% of price), and any upfront rehab or improvements. That denominator is what your return is measured against.