How to calculate ROI on real estate
Return on investment compares your total profit with the cash you invested. Profit includes cash flow, loan paydown and appreciation, less selling costs.
The formula
ROI = total profit ÷ total cash invested × 100
Worked example
$80,000 invested and $40,000 of total profit over five years is a 50% total ROI, or about 8.4% a year.
How to use this calculator
Enter the purchase price, the cash you invested, the cash flow you expect, the appreciation and the loan paid down. Set the number of years held. The real estate ROI calculator shows the total return, the annualized return and the profit, split into the parts that come from cash flow, appreciation and loan paydown. There is no field for selling costs, so subtract them from the profit yourself.
What the result means
Total ROI is the profit over the whole holding period as a share of your cash. A total ROI of 50% means you got back your cash plus half as much again. Annualized ROI turns that into a yearly rate, which is the figure to use when you compare deals held for different lengths of time. Both are pre-tax, and both depend on a sale price you can only estimate today.
More examples
Where the profit comes from
Here is one way the $40,000 in the worked example could add up over five years.
| Source | Amount |
|---|---|
| Cash flow ($3,000 a year) | $15,000 |
| Loan paydown | $12,000 |
| Appreciation | $33,000 |
| Selling costs | −$20,000 |
| Total profit | $40,000 |
More than half of the gain before selling costs is appreciation, which is the least certain part.
Why the holding period matters
The same 50% total ROI is worth very different yearly rates.
| Years held | Total ROI | Annualized ROI |
|---|---|---|
| 3 | 50% | 14.5% |
| 5 | 50% | 8.4% |
| 10 | 50% | 4.1% |
Two more deals
You invest $60,000 and, after seven years, total profit is $45,000. Total ROI is $45,000 ÷ $60,000 = 75%. Annualized, that is about 8.3% a year, slightly below the five-year example even though the total is higher.
A deal can also lose money. If you invest $80,000 and come out $8,000 behind after three years, total ROI is −10%, or about −3.5% a year.
What changes the result
- Appreciation. It is often the largest part of profit and the hardest to predict.
- Selling costs. They come straight off the profit. Without the $20,000 of selling costs, the example profit would be $60,000.
- Cash invested. A smaller down payment raises ROI when the deal goes well and deepens the loss when it does not.
- Time. The longer it takes to earn the same profit, the lower the annualized return.
- Loan paydown. It grows slowly in the early years of a loan and faster later.
Common mistakes
- Dividing total ROI by the years. 50% over five years is not 10% a year. Compounded, it is about 8.4%.
- Leaving out selling costs.
- Counting only the down payment as cash invested and ignoring closing costs and repairs.
- Comparing a total ROI on one deal with an annualized ROI on another.
- Treating projected appreciation as certain.
Related calculators
For the yearly cash return alone, use the cash on cash return calculator. The home appreciation calculator projects a future value, and the home sale proceeds calculator estimates what is left after selling costs. Results are estimates, not financial advice.
Frequently asked questions
How is annualized ROI calculated?
(1 + total ROI) ^ (1 ÷ years) − 1.
What is a good ROI?
It depends on risk and on what else you could earn. Compare similar deals on the same basis.
Does ROI include tax?
This calculator is pre-tax.
What is the difference between ROI and cash on cash return?
Cash on cash return looks at one year of cash flow. ROI adds loan paydown and appreciation and subtracts selling costs, over the whole time you own the property.
Can ROI be negative?
Yes. If the property loses value, or selling costs and negative cash flow outweigh the gains, total profit is below zero and so is ROI.
Why is annualized ROI lower than total ROI divided by years?
Because returns compound. Growing at about 8.4% a year for five years reaches 50%, so a simple average of 10% overstates the yearly rate.
Does ROI include loan paydown?
Yes. Each payment reduces the loan balance, and that reduction counts as profit because you keep it when you sell.