The Ultimate Guide To Calculating ROI On A Rental Property Investment

Before you venture into investing in rental properties or adding a rental property to your existing investment portfolio, it’s wise to do your due diligence. If you’re thinking of purchasing an investment property with the purposes of renting it, it’s important to not only calculate your potential ROI before you invest, but also be aware of the traps into which many investors fall.

Here’s The Ultimate Guide To Calculating ROI On A Rental Property Investment

Before any finer calculations begin, there is some quick math every investor can perform to decide if investing in any given rental property is worth it.

Step 1: Know your targeted post-rehab value.

As you consider investing in a rental property, it’s best to start by determining the targeted value of the property once all the rehab work is complete. Even though you will be hanging onto the property, this step is still critically important to the financial viability of the investment.

Step 2: Calculate the rehab costs.

This step requires the most work in calculating, however an estimated rehab cost will help you determine if there’s enough wiggle room in your math to even make investigating the property worth your time. If you’re unable to access the property or want to use quicker numbers, a good rule of thumb is $50/sq foot in repair costs.

Step 3: Know your targeted rental rate.

Determine the price at which you hope to rent it. By starting with a monthly goal in mind, you’ll be able to look at comparable rental properties and ensure the area and market can easily demand that price. A good resource for projected rents is Additionally, you have to keep property taxes and ongoing repairs in mind.

Step 4: Determine the buying price.

If the property is in foreclosure or has an upcoming auction, the buying price may be an unknown. However, you should know for certain what purchase price makes you comfortable. Anything below that price is even better. And if a property is listed for sale, you should similarly know the purchase price you want as it relates to what you’d negotiate for and what you’d walk away from. A good rule of thumb for an expected purchase price is 70% of your projected post-rehab value, less repairs.

Before You Borrow, Make Sure The Deal Makes Sense

Doing some simple math that assumes you use all cash for this investment will swiftly show whether or not it’s worth proceeding further. Even though there is additional profit to be made each month in rent, experts advise that when rehabbing rental properties it’s best to ensure you still add ample value to properties even before they’re listed for rent.

Target Loan After Rehab

– (Rehab Costs + Purchase Price+ Closing Costs + Holding Costs)


Calculating ROI On A Rental Property Using A Landlord Loan

Let’s say you found an investment property you wanted to rehab and then rent. You negotiated a purchase price of $55,000. You planned to spend $15,000 in rehab expenses, plus an additional $10,000 in closing and holding costs. You chose to finance the investment via a hard money loan.

Hard Money Loan Cash Deal
Purchase Price 55,000 55,000
Rehab Cost 15,000 15,000
Holding Costs 4,000 4,000
Finance Costs 6,000
Total Project Cost 80,000 74,000
Loan Amount 60,000
Cash Needed 20,000 74,000
After Repair Value 125,000 125,000
Long Term Loan % 70% 70%
Long Term Loan Amount 87,500 87,500
Profit 7,500 13,500
Cash-on-cash Return 38% 18%

Then, once the rehab work is done, you select to refinance the loan as a long-term landlord loan.

In the above scenario, the borrower paid themself back the $20,000 cash that was originally spent when purchasing and holding the property. The return of $7,500 net profit is in addition to ongoing income they earn as a landlord.

For instance, if the rent is $1,600, but the monthly holding costs including the loan expense, taxes, insurance and a 10% vacancy factor is approximately $1,230 netting you $370 per month or $4,440 per year in income.

Rental Profit
Rent 1,600
Vacancy (10%) (160)
Loan Payment (615)
Taxes/Insurance (455)
Net Monthly Rental Income 370
Net Yearly Rental Income 4,440

In addition to the above-mentioned example, there’s a highly regarded investment strategy for landlords called BRRRR. Read more about it here.

When To Borrow & When To Pay Cash

Some investors utilize cash only on their investment properties and have shied away from borrowing. However, as illustrated above, investors can generate higher cash-on-cash returns by partnering with a hard money lender in order to help leverage their cash.

For example, an investor with $100,000 in cash might be able to purchase one property at a time, rehab and rent it over the course of 3 months and refinance to a long term loan. This process may be repeated 3-4 times during the year.

Partnering with the best hard money lender would allow that same investor to leverage his or her cash by investing $20,000 per property for up to 5 properties at once, while borrowing the rest.

Additionally a hard money lender offers many benefits in addition to financing. They add to your real estate investment team to help you:

  • Evaluate each investment property’s ROI
  • Provide due diligence on contractors and suppliers
  • Guide you through the entire investment and rehab process from initial due diligence to completion of the deal through sale or refinance

Work With Ashmore Partners, The Best Hard Money Lender Serving PA, NJ, DE

All clients work directly with an Ashmore Partners co-founder to ensure stellar advice and consultation by experienced real estate investors. Our rates have no junk fees and no hidden fees. All clients receive access to our profit calculator to estimate your costs and gain visibility into a projected investment return.

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