Rental Property ROI Explained

The four engines of return

Cash flow is the money left after expenses and debt service. Principal paydown converts your tenants' rent into equity. Appreciation changes the asset's value. Tax treatment affects what you keep.

Cash flow and paydown are largely mechanical once the deal is set. Appreciation is a forecast. Tax outcomes depend on your structure, so speak to an accountant rather than assuming.

Measuring total ROI

Total ROI over a holding period adds cumulative cash flow, principal paydown and value change, divided by the cash you invested. Annualise it to compare against other investments.

Always run the calculation twice: once with your growth assumption and once at zero growth. The zero-growth version tells you whether the property itself works.

Why IRR matters

IRR accounts for when cash arrives, which matters when returns are back-loaded by a sale or a refinance. Two deals with identical total ROI can have very different IRRs.

Include selling costs in the exit: commission, legal fees and any tax consequences meaningfully reduce realised return.

Frequently asked