ROI Formulas Cheat Sheet

How to use these rental ROI formulas

No single number tells you whether a rental is a good investment. Cap rate and NOI describe the property, cash-on-cash return and DSCR describe your financing, and IRR, equity multiple and total return describe the whole hold, including the sale. Use the card above as a quick reference, then read below for what each formula really measures, one worked duplex example with every metric calculated, and the situations where each number misleads.

Everything here is pre-tax unless stated otherwise. All figures in the example are hypothetical and chosen to make the arithmetic easy to follow; they are not market data. Plug in your own numbers with the rental ROI calculator or the property analysis worksheet.

The worked example: one hypothetical duplex

Example: a side-by-side duplex bought for $360,000. The buyer pays 25% down ($90,000) plus $7,200 in closing costs, so total cash invested is $97,200. The loan is $270,000 at 6.75% fixed for 30 years, which gives a monthly principal and interest payment of $1,751.21, or $21,014.58 a year.

Each unit rents for $1,800 a month. Year-one income and operating expenses:

We will use these same numbers for every metric below, so you can see how one property can look attractive on one measure and weak on another.

Net operating income (NOI)

NOI = Effective gross income − Operating expenses

Duplex: $41,040.00 − $18,283.20 = $22,756.80.

NOI is the property’s income before financing and income tax. It is the foundation for cap rate and DSCR, so an error here flows into every other number. Note that the card above writes NOI as “annual rent minus annual operating expenses”; in practice you should start from effective rent, after an allowance for vacancy and unpaid rent.

When NOI misleads

• Missing reserves. Sellers often present NOI with no allowance for roofs, water heaters, flooring or HVAC replacements. Those costs are real, they just arrive unevenly. Leaving them out inflates NOI and every ratio built on it.
• Self-management. If the owner manages the property and lists no management fee, NOI overstates what a buyer who hires a manager (or values their own time) will earn.
• Stale property tax. In many places the assessment resets after a sale. Using the seller’s tax bill can understate your expenses from the first year.
• Pro forma rents. NOI based on “market rent” rather than signed leases is a forecast, not a fact. Check rents with the rent estimator and actual leases.

Cap rate

Cap rate = NOI ÷ Purchase price (or current value) × 100

Duplex: $22,756.80 ÷ $360,000 = 0.0632, so the cap rate is 6.32%.

Cap rate is the return you would earn if you paid all cash, before income tax. Because it ignores financing, it is useful for comparing similar properties in the same market, and for estimating value: if comparable duplexes trade at a 6.5% cap rate, a property with $22,756.80 of NOI implies a value of roughly $22,756.80 ÷ 0.065 = $350,105.

When cap rate misleads

• It inherits every flaw in NOI. A high cap rate built on missing expenses is not a high cap rate.
• It is a snapshot of one year. It says nothing about rent growth, upcoming capital projects or the condition of the building.
• Comparing cap rates across very different markets or property types is weak. A higher cap rate often reflects higher risk, such as weaker tenant demand or an older building, not a better deal.
• For an owner deciding whether to keep a property, the relevant figure is NOI divided by today’s value, not the original price. A property bought years ago can show a large “cap rate on cost” while the equity tied up in it earns much less.

Gross rent multiplier (GRM)

GRM = Purchase price ÷ Gross annual scheduled rent

Duplex: $360,000 ÷ $43,200 = 8.33. In plain terms, the price equals about 8.3 years of gross rent.

GRM is quick because it only needs the price and the rent roll. A lower GRM means more rent per dollar of price. It is handy for sorting a long list of listings in one neighborhood before you do real analysis.

When GRM misleads

GRM ignores every expense. Two duplexes at the same GRM can have very different NOI if one has owner-paid utilities, higher property taxes or an older roof. It also ignores vacancy. Use it to screen, never to decide.

The 1% rule and its limits

Monthly rent ÷ Purchase price ≥ 1%

Duplex: $3,600 ÷ $360,000 = 1.00%. It exactly meets the rule. That sounds encouraging, yet as you will see below, year-one cash-on-cash return is under 2% and DSCR is only 1.08. Meeting the 1% rule did not make this a strong cash flow deal at a 6.75% interest rate.

Why the rule is so limited:

• It ignores interest rates. The same rent-to-price ratio produces very different cash flow at 4% versus 7% mortgage rates.
• It ignores expenses that vary by location. Property tax and insurance can differ by thousands of dollars a year for similar properties in different states or counties.
• It ignores condition. An older building may pass the rule only because buyers are pricing in deferred maintenance.
• It is market-dependent. In many higher-priced metro areas almost nothing meets it, while in some lower-priced areas many properties do because risk and turnover are higher.

Treat the 1% rule as a question (“is this worth a closer look?”), not an answer.

Cash flow and cash-on-cash return

Annual cash flow = NOI − Annual debt service

Cash-on-cash return = Annual cash flow ÷ Total cash invested × 100

Duplex cash flow: $22,756.80 − $21,014.58 = $1,742.22 a year, about $145 a month.

Cash-on-cash return: $1,742.22 ÷ $97,200 = 1.79%.

Cash-on-cash return answers a practical question: how much spendable cash does each dollar I put in produce this year? Include everything you paid to get the property running in the denominator: down payment, closing costs, and any up-front repairs or furnishing.

When cash-on-cash return misleads

• It ignores principal paydown and appreciation. Our duplex earns only 1.79% in cash, but tenants are also paying down the loan, which shows up in total return below.
• It rewards leverage blindly. A smaller down payment raises cash-on-cash return when cash flow is positive, but it also raises risk and can flip cash flow negative if rents dip.
• It falls apart for long-held properties. If you bought ten years ago, your original cash invested is a small number and cash-on-cash looks huge. The better question is what your current equity earns. The keep-or-sell calculator frames it that way.
• It is one year. A year with a vacancy or a new water heater can make an otherwise solid property look poor, and vice versa.

Debt service coverage ratio (DSCR)

DSCR = NOI ÷ Annual debt service

Duplex: $22,756.80 ÷ $21,014.58 = 1.08.

DSCR tells you how much room NOI has to cover the mortgage. At 1.08, NOI covers the payment with only 8% to spare. A modest shock would push it below 1.0: an extra month of vacancy on one unit ($1,800) plus a $1,000 repair over budget would cut NOI to about $19,956.80 (ignoring the small drop in the management fee), a DSCR of 0.95, and the owner would be writing checks. Lenders use DSCR to size investor loans, and the minimum they accept varies by lender and program, so ask before you assume a deal will qualify. Our financing calculator and break-even calculator help you test this.

When DSCR misleads

DSCR is only as honest as the NOI behind it, and a lender’s underwriting NOI may differ from yours. It also ignores variable-rate risk: if your loan can reset, test DSCR at the higher payment, not just today’s.

Total return (first year)

Total return = (Cash flow + Principal paydown + Appreciation) ÷ Cash invested × 100

On the $270,000 loan, about $2,877.52 of principal is paid off in year one. If the property appreciates 3% (an assumption, not a forecast), that adds $10,800 of value.

Duplex: ($1,742.22 + $2,877.52 + $10,800.00) ÷ $97,200 = $15,419.74 ÷ $97,200 = 15.86%.

This is the formula on the card labelled “Total ROI”, extended to include principal paydown, which is a real increase in your equity.

When total return misleads

• Appreciation is unrealized and uncertain. In our example, $10,800 of the $15,419.74 is assumed appreciation. At 0% appreciation, total return falls to 4.75%. If values fall, it can go negative.
• You cannot spend equity without selling or borrowing. Both cost money: selling costs, refinance closing costs, and taxes.
• It ignores the cost of selling. Commissions and closing costs, often several percent of the price, come out of the appreciation when you finally sell.

IRR and equity multiple over a five-year hold

Cap rate, cash-on-cash and total return all look at one year. To judge the whole investment, model the hold from purchase to sale. Assumptions for the duplex (all hypothetical):

• Rents and operating expenses both rise 3% a year.
• The loan payment stays at $21,014.58 a year (fixed rate).
• The property is sold at the end of year 5 for 3% annual appreciation: $360,000 × 1.03⁵ = $417,338.67.
• Selling costs are 6% of the sale price: $25,040.32.
• The remaining loan balance after 60 payments is $253,464.42.

Net sale proceeds before tax: $417,338.67 − $25,040.32 − $253,464.42 = $138,833.93.

Internal rate of return (IRR)

IRR = the discount rate at which the present value of all cash flows (including the initial investment) equals zero

There is no simple closed-form formula; spreadsheets solve it by trial (in Excel or Google Sheets, =IRR() over the six cash flows). For the duplex, the cash flows above produce a pre-tax IRR of about 10.1% a year.

IRR rewards money that comes back sooner. That makes it the right tool for comparing options with different timing, such as keeping a property five more years versus selling now and investing the proceeds elsewhere.

Equity multiple

Equity multiple = Total cash returned to investor ÷ Total cash invested

Total cash returned: $1,742 + $2,425 + $3,128 + $3,852 + $143,432 = $154,580 (rounded). Equity multiple: $154,580 ÷ $97,200 = 1.59×. The investor gets back their $97,200 plus about $57,380 of pre-tax profit.

When IRR and equity multiple mislead

• Most of the return comes from the sale. In our example, $138,834 of $154,580 arrives in year 5. Change the sale price assumption and IRR moves sharply. Run a downside case at 0% or 1% appreciation before trusting it.
• IRR ignores scale and time. A 25% IRR over six months may produce fewer dollars than a 10% IRR over ten years. That is why equity multiple is reported alongside it.
• Equity multiple ignores time. A 1.59× multiple over 5 years is far better than 1.59× over 15 years.
• Both are pre-tax here. Taxes at sale, including depreciation recapture, can take a meaningful bite from the year-5 proceeds. See the rental tax deduction cheat sheet and model after-tax proceeds with the keep-or-sell calculator.

All duplex metrics side by side

The honest reading: this duplex is a thin cash flow property whose returns depend mainly on loan paydown and appreciation. That may suit a long-term buyer with reserves; it does not suit someone who needs monthly income or has little cushion for repairs.

Common mistakes when calculating rental returns

• Skipping vacancy. Assuming 12 months of rent from every unit every year.
• Leaving out capital reserves. Treating a new roof as a surprise instead of a scheduled cost.
• Mixing up price and value. Using purchase price for a property you have owned for years.
• Putting the mortgage in NOI. It belongs below NOI, in cash flow and DSCR.
• Forgetting closing and rehab costs in the cash invested figure, which inflates cash-on-cash return.
• Judging on one metric. Our duplex passes the 1% rule and shows a 15.86% total return, yet barely covers its mortgage.
• Ignoring selling costs and taxes when estimating IRR or deciding whether to sell.

For a broader walkthrough, read how to calculate ROI on rental properties and cash versus leverage in real estate.

Related tools and guides

• Rental ROI calculator
• Operating expense ratio calculator
• Multi-unit property calculator
• Property investment analyzer
• Keep or sell rental property calculator
• All landlord cheat sheets

This page is general educational information, not investment, legal or tax advice. Examples are hypothetical. Consult a licensed professional before making decisions about a specific property.