Where the return comes from
A leveraged rental produces return from three sources: cash flow each year, the principal you pay down on the loan, and any change in the property's value when you sell. This calculator keeps them separate so you can see which one carries the result.
| Component | Amount |
|---|---|
| Cash invested (down payment, closing, repairs) | ($94,000) |
| Cash flow, years 1–10 | $13,584 |
| Loan paid down | $35,278 |
| Price change at 0% a year | $0 |
| Selling costs at 6% | ($19,200) |
| Total profit before tax | $15,661 |
| Total ROI | 16.7% |
| Annualized return (IRR) | 1.60% |
ROI vs IRR
Total ROI is profit divided by the cash invested, with no regard to time. The internal rate of return (IRR) is the discount rate at which the present value of all the cash flows, including the sale, equals the money put in, so it accounts for when each dollar arrives. It can be measured on the property alone (NOI and net sale price) or on your equity (cash flow after the loan), which is what this worksheet does.[1]
A 50% ROI earned over 3 years is far better than the same ROI over 15. The table shows how the IRR changes with the holding period, everything else unchanged:
| Years held | Total profit | Total ROI | IRR |
|---|---|---|---|
| 5 | ($16,666) | -17.7% | -3.83% |
| 10 | $15,661 | 16.7% | 1.60% |
| 15 | $67,166 | 71.5% | 3.91% |
Your assumptions drive the answer
Rent growth, expense growth and the property's future price are guesses. The example sets the price change to zero on purpose, so the result reflects only what is known today. The results panel recalculates the IRR at price changes of −2%, 0%, +2% and +4% a year, so you can see how much of any projected return depends on appreciation. Property values can fall,[3] and past performance does not necessarily predict future results.[2]
Before income taxThese figures ignore income tax on rental profits and on the sale. In the U.S., a gain on selling a rental held more than a year is generally a long-term capital gain, and the part that comes from depreciation taken (unrecaptured section 1250 gain) is taxed at up to 25%.[4] The tax on sale of rental property calculator estimates it.
Financing limits
The down payment is not entirely your choice: Fannie Mae's eligibility matrix caps a one-unit investment purchase at 85% loan-to-value and a two- to four-unit purchase at 75%, so at least 15% or 25% down.[5] Change the down payment to see how leverage raises or lowers the IRR at your interest rate.
To pull equity out of a property you already own, see the cash-out refinance calculator. For a single year, use the rental property calculator; for valuing a property by its future income instead of measuring your return, use the discounted cash flow calculator; for the year-one cash return alone, the cash-on-cash return calculator.
Frequently asked questions
How do you calculate ROI on a rental property?
Add up the cash flow over the years you own it and the net proceeds from selling (sale price minus selling costs minus the loan balance), subtract the cash you invested, and divide by that cash.
What is the difference between ROI and IRR?
ROI ignores time; IRR is an annual rate that accounts for when each cash flow arrives. Use IRR to compare investments held for different lengths of time.
Does this include appreciation?
Only if you enter it. The default price change is 0% a year, and the results show the IRR at several other rates for comparison.
Is loan paydown a return?
Yes, but you only receive it when you sell or refinance. That is why it appears in the sale proceeds rather than in yearly cash flow.