How to Calculate ROI on Rental Properties

Return on Investment (ROI) tells you how profitable your rental property is compared to what you invested.

🧮 Basic ROI Formula

ROI=Annual Net ProfitTotal Investment×100ROI = \frac{\text{Annual Net Profit}}{\text{Total Investment}} \times 100ROI=Total InvestmentAnnual Net Profit​×100

🏠 Step-by-Step Calculation

1. Calculate Your Total Investment

This includes:

• Purchase price

• Closing costs

• Renovations/repairs

• Furniture (if applicable)

👉 Example:₱3,000,000 (property) + ₱200,000 (repairs) = ₱3,200,000 total investment

2. Calculate Annual Rental Income

• Monthly rent × 12

👉 Example:₱20,000 × 12 = ₱240,000 per year

3. Subtract Annual Expenses

Include:

• Maintenance

• Property management

• Taxes

• Insurance

• Utilities (if you pay them)

👉 Example:₱240,000 income − ₱60,000 expenses = ₱180,000 net profit

4. Compute ROI

Now plug it into the formula:

👉 ₱180,000 ÷ ₱3,200,000 × 100 = 5.6% ROI

⚡ Quick ROI Benchmarks

• 3% to 5% → Low return (usually high-value areas)

• 6% to 10% → Good investment

• 10%+ → High return (often higher risk)

💡 Pro Tips (Very Important)

• Cash Purchase vs Loan

  • Cash = lower ROI but safer

  • Loan = higher ROI (because you invest less upfront)

• Short-Term Rentals

  • Often higher ROI but less stable

• Vacancy Rate Matters

  • Always estimate 5% to 10% vacancy

• Hidden Costs

  • Repairs, tenant turnover, furnishing

🧠 Advanced Metric (Better Than ROI)

Consider Cash-on-Cash Return if using a loan:

Cash-on-Cash=Annual Cash FlowCash Invested×100\text{Cash-on-Cash} = \frac{\text{Annual Cash Flow}}{\text{Cash Invested}} \times 100Cash-on-Cash=Cash InvestedAnnual Cash Flow​×100

👉 This often gives a more realistic picture for leveraged investments.

🏆 Bottom Line

• ROI shows overall profitability

• A “good” ROI depends on your risk tolerance and location

• The best investors always compare:

  • ROI

  • Cash flow

  • Appreciation potential