How to Calculate Percentage Return on Rental Property

Imagine you’ve just closed on a rental property and you’re eager to understand the financial returns. You want to know if your investment is truly paying off. Calculating the percentage return on a rental property isn’t just about making sense of numbers—it’s about gauging the success of your investment strategy. Here’s a detailed guide to calculating it, breaking down every step to ensure clarity and accuracy.

Step 1: Determine Your Annual Rental Income
Begin by calculating the total rental income you receive in a year. This includes all monthly rent payments and any additional income from the property, such as parking fees or laundry income. Let’s say your property generates $1,200 per month in rent. Multiply this amount by 12 to get your annual rental income.

Example Calculation:
Monthly Rent: $1,200
Annual Rental Income: $1,200 × 12 = $14,400

Step 2: Calculate Your Annual Operating Expenses
Next, you need to account for the costs associated with maintaining and operating the property. These expenses can include property management fees, maintenance, insurance, property taxes, and utilities.

Example Calculation:

• Property Management Fee: $100 per month × 12 = $1,200
• Maintenance Costs: $500 annually
• Insurance: $800 annually
• Property Taxes: $2,000 annually
• Utilities: $600 annually

Total Annual Operating Expenses: $1,200 + $500 + $800 + $2,000 + $600 = $4,100

Step 3: Compute Your Net Operating Income (NOI)
Subtract your total annual operating expenses from your annual rental income to find your Net Operating Income (NOI). This figure represents your property’s profitability before accounting for mortgage payments and income taxes.

Example Calculation:
Annual Rental Income: $14,400
Total Annual Operating Expenses: $4,100
Net Operating Income: $14,400 - $4,100 = $10,300

Step 4: Determine Your Property’s Purchase Price
Identify the purchase price of your property. If you bought the property for $150,000, this is the figure you’ll use in your percentage return calculation.

Step 5: Calculate Your Percentage Return on Investment (ROI)
The percentage return on investment is calculated by dividing the Net Operating Income by the purchase price of the property, then multiplying by 100 to get a percentage.

Example Calculation:
Net Operating Income: $10,300
Purchase Price: $150,000
Percentage Return on Investment: ($10,300 ÷ $150,000) × 100 = 6.87%

This means your rental property is generating a 6.87% return on your investment annually.

Step 6: Consider Additional Factors
To get a more comprehensive understanding of your property’s performance, consider additional factors like mortgage interest, potential tax benefits, and property appreciation. These can significantly affect your overall return on investment.

Step 7: Adjust for Financing
If you financed the property, your calculation would be slightly different. You would need to account for mortgage payments to get a more accurate picture of your return. Subtract your annual mortgage payments from the Net Operating Income to get your adjusted return.

Example Calculation with Mortgage:
Annual Mortgage Payments: $8,000
Adjusted NOI: $10,300 - $8,000 = $2,300
Adjusted Percentage Return on Investment: ($2,300 ÷ $150,000) × 100 = 1.53%

Step 8: Track and Analyze Performance Over Time
Regularly review your rental property’s performance to ensure it remains a viable investment. Compare your returns with market averages and adjust your strategy as necessary to optimize your returns.

By following these steps, you can accurately calculate the percentage return on your rental property, providing you with valuable insights into your investment’s performance. This detailed analysis will help you make informed decisions and maximize your returns.