What is a Good ROI for Real Estate Investing?
Flipping houses and buying rental properties is one of the most proven ways to build generational wealth. However, many new investors make the mistake of assuming that "cash flow" automatically equals a "good investment."
Just because a rental property puts $500 in your pocket every month doesn't mean it is a smart place to park your money. To truly evaluate a property, you must look at its Return on Investment (ROI).
So, what exactly is a "good" ROI in real estate?
The Benchmark: The S&P 500
When evaluating any investment, you must always compare it to the easiest alternative: doing absolutely nothing and parking your money in an S&P 500 index fund.
Historically, the stock market returns an average of 8% to 10% per year. This is your baseline. Because buying, maintaining, and managing real estate requires significantly more active work than simply holding a stock, your real estate ROI must beat the stock market to be worth your time.
Most experienced real estate investors aim for an annual ROI of 12% to 15% or higher.
Two Ways to Calculate Real Estate ROI
There are two primary methods for calculating your real estate ROI, depending on how you purchased the property.
1. The "All Cash" Method
If you bought the property entirely in cash, calculating your ROI is incredibly simple. You take your annual net profit (your rental income minus all taxes, insurance, and maintenance costs) and divide it by the total cash you spent.
- Purchase Price: $200,000 (All cash)
- Annual Net Rental Income: $24,000
- ROI: $24,000 ÷ $200,000 = 12% ROI
2. The "Cash-on-Cash" Return (Financing)
Very few people buy houses in all cash. If you took out a mortgage, your ROI calculation completely changes because of leverage. You only look at the actual cash you put out of your own pocket (the down payment and closing costs).
- Purchase Price: $200,000
- Your Down Payment (20%): $40,000
- Annual Net Income (after paying the mortgage): $6,000
- ROI: $6,000 ÷ $40,000 = 15% ROI
Notice how using a mortgage actually increased the percentage return on your own cash! This is the power of leverage in real estate.
Don't Forget Appreciation!
The ROI calculations above only look at your monthly cash flow. They do not factor in the fact that the actual property is slowly increasing in value every single year. When you eventually sell the house, that property appreciation will drastically boost your total, lifetime ROI.
Before you make an offer on your next duplex, run the exact numbers through our free ROI Calculator to see if the property is actually a goldmine, or just a money pit in disguise!