1. What is ROI in Rental Properties?

Return on Investment (ROI) measures the profitability of a rental property by comparing the net return to the total investment. Including depreciation in the calculation provides a more accurate picture of tax-advantaged returns.

2. How Does the Calculator Work?

The calculator uses the ROI formula with depreciation:

Where:

• Annual Rental Income — Total yearly rent collected
• Annual Expenses — All property-related expenses (mortgage, taxes, maintenance, etc.)
• Depreciation — Annual tax depreciation (typically 1/27.5 of property value for residential)
• Total Investment — Purchase price plus any renovation costs

Explanation: The formula accounts for both cash flow and tax benefits to give a comprehensive ROI calculation.

3. Importance of Including Depreciation

Details: Depreciation is a non-cash expense that reduces taxable income while preserving cash flow. Including it in ROI calculations shows the true after-tax return potential of a property.

4. Using the Calculator

Tips: Enter all values in dollars. For depreciation, use annual amount (typically property value divided by 27.5 for residential properties). A good ROI varies by market but generally 8%+ is considered decent.

5. Frequently Asked Questions (FAQ)

Q1: Why include depreciation in ROI calculations?
A: Depreciation reduces taxable income, creating "tax savings" that effectively increase your return. It's a real financial benefit of rental properties.

Q2: How is depreciation calculated?
A: For residential properties, divide the building value (not land) by 27.5 years. Commercial properties use 39 years.

Q3: What's a good ROI for rental properties?
A: This varies by market, but generally 8-12% is good, with 15%+ being excellent. Consider both ROI and appreciation potential.

Q4: Does this calculator account for appreciation?
A: No, this calculates cash-on-cash ROI. For total return, you'd need to factor in potential property value increases separately.

Q5: Should I include mortgage principal payments?
A: No, only include interest as an expense. Principal payments increase your equity but aren't tax-deductible expenses.