Real estate ROI is complex because multiple returns happen simultaneously: cash flow from rent, equity from mortgage paydown, appreciation, and tax benefits. Understanding each component helps you evaluate investments properly.
Key ROI Metrics
Cash-on-cash return = Annual cash flow ÷ Total cash invested. This measures what your money earns right now. Target 8-12% for rental properties.
Cap rate = NOI ÷ Property value. This measures income return independent of financing, useful for comparing properties.
Total return combines cash flow, principal paydown, appreciation, and tax benefits. A property with modest 6% cash-on-cash return might deliver 15-20% total return when all components are included.
The power of leverage: a $300,000 property appreciating 3% gains $9,000 in value. If you only put $60,000 down, that's a 15% return on your cash—on top of other returns.