how do you calculate a return on investment for rental properties that's today's video let's dive in hey everybody I'm Clayton Morris I'm the founder of Morris invest long time real estate investor and the whole goal of this channel is to help you build passive income through real estate today we're going to talk about the most important number in all of real estate investing it's the whole reason I do what I do its ROI which is return on investment super simple to figure out but it really is the most important number a lot of times I'll talk to investors on the phone and I ask them the question when they tell me they own a property or they have a property that they're renting out and I say great what's the ROI I don't know I don't know most people simply don't know what the return on investment is for a rental property so today I'm going to show you my simple formula on how to figure this out and really is the foundation of everything I do in real estate investing and it should be for you as well so let's go to the whiteboard okay we're over here at the whiteboard and I want to talk about one of my favorite subjects which is ro I I love ROI because after all it's the whole reason that we're doing what we're doing in real estate investing in order to create our a line I don't care about the four walls and a roof of real estate they're all the same to me they have four walls and a roof and that's it I care more about ROI than I do the house itself and you should too so today we're going to talk about ROI using the cash on cash formula cash on cash just means how much cash is coming in and how much cash went out so if you have $40,000 in the bank you're buying a $40,000 house with cash what is the return that you could expect to get on that $40,000 now we can do a whole separate video on mortgages and debt service in fact we have other videos specifically on how to figure out the debt service on a property if you're using a mortgage but for this we are specifically using cash on cash to make the formula is easier for you okay so let's dive in so let's say we're using a $40,000 house so $40,000 is going to be the cost of our three-bedroom one-bath house these are the typical kinds of properties that I buy and renovate and it's going to cash flow let's make it nice round numbers seven hundred dollars a month so seven hundred dollars a month from a tenant it's going to cash flow and that's it okay great so here's how we figure out our line we're going to take that seven hundred dollars a month and we're going to multiply that times 12 that's going to give us our annual rent so 700 times 12 gives us $8,400 now that is the gross that is the gross rent for the year now we are going to divide this number by the all-in cost of the house which is $40,000 so we're going to eight divided 8,400 by 40,000 40,000 and that's going to give us a 21 percent gross ROI which is fantastic right that's but that's gross remember so that's the gross Arline of 21 percent now with all of our properties I always am super conservative in my formula for figuring out return on investment because I want to take out 40% for vacancy repairs expenses all of those things taxes get thrown into this forty percent but because remember I'm rehabbing the house so I don't have to worry about expenses I'm not going to worry about vacancies because I'm filling it with a tenant with my property management team right away so this forty percent doesn't really come into effect so when at the end of the year my wife and I like to look at our arm statements we end up usually being right here right around this twenty-one percent gross but I always want to be super conservative when I'm buying a house always want to figure this 40% how do we figure 40% and how do we get to our number let's go back to the whiteboard so $40,000 is our house and it's $700 a month for rent so I'm going to take that $700 again multiply it times 12 is going to give us the same number 8400 but now I'm going to multiply this number times 0.6 now I get so many emails from people to say wait a minute wouldn't you multiply it times 0.4 no no I want to take out 40% you know 100 minus 40 is 60 so I'm going to multiply this times 0.6 so eighty four hundred times 0.6 gives me five thousand forty dollars that's my net cash flow from my tenants this month from this year so it's started with that to be super conservative I took out 40 percent which is how you do it right here and I'm left with this for the year now I divide this by the $40,000 number divided by that gives me a net cash flow of 0.12 which is 12 that is a twelve percent return on my investment that is a net that is a ridiculously high ROI that is the number that I go for on every one of my properties is a net ROI between ten and twelve percent net not gross not gross net I hope that makes sense that is how you figure out ROI very very simple and remember in that forty percent number we're including you know the taxes we're including the vacancies vacancy number right we're including our expenses and repair and all of that gets rolled into that 40% for me so it keeps it very very simple and it's a quick and dirty way for you to find out especially in a single-family house or you know duplex or a triplex or a four family when you start getting into commercial properties you know you're going to be looking at other things you're going to have to consider but for residential real estate doing those one sample single-family homes duplexes triplexes or quad flexes this is how we figure out our ally there you go simple way to figure out return on investment I hope this was instructional for you if you have any questions I would love to hear about them please leave them in the comments thread below you know why one thing I did mention in this video I talked about vacancy rates I personally love to buy properties with a very low vacancy rate so those are the markets that I'm in and I have a whole video where I talk about vacancy rates and in fact I talked about some of the five cities with the highest vacancy rates that you want to avoid you can click on that little car that just popped up here we publish videos multiple times a week everyone so please do me a big favor and click on the big subscribe button right here and join our great community here we'll see you back here next time with some more great videos everyone just go over and subscribe we publish them multiple time a week I'm Clayton Morris go out there take action everyone and become a real estate investor

Why do you use 40 percent, i heard to use 50 percent.

What is your reason for choosing 40 vs 50.

I like 40 more of course but am curious

So how come you don’t also include what your spending to fix the place up? Or does that fall in the 40%?

Hi Clayton, if I buy a property that cost R400000 which is about $29000 and my ROI is 6% is it good or bad? Edgar from South Africa 🇿🇦

I love the math and the video, however, where are you able to find a $40,000 property that you can rent for $700 a month? Those numbers seem extremely unrealistic in any market in North America. I do understand this video is from 2017 which may clear things up a little, but that rent rate still appears to be a dream come true for a real estate investor. Thanks for the knowledge and I would love to see some comments.

Thank you for the great video very helpful

Would the 0.6% include the HELOC rate at 4% that you are using to buy the property?

100k with 500 net per month = 6%. Is that bad? Should I just sell it and forget about it?

Great information, do you do any one on one mentoring?

$40,000? That's cheap, no way I could find a €40,000 house here in Belgium. Those aren't brick houses right?

Turkey House finish 40000 BS

What about the rehab cost what about the interest math don't add

I gotta say. This video would have been absolutely perfect, if it started out like in buying a home in real life. THEY ALL need some sort of rehab, especially the low lost homes. Would have been really nice from start to finish to include the rehab costs then break down the formulas to show ROI. Again, real life scenario. Can anyone point me in that direction? Been searching and every video either sucks completely or leaves bits of information out so I never get the complete soup to nuts picture.

Do you have any clients from Auckland NZ

Is 40k just for the purchase of the home? If so, you don’t calculate your rehab repairs since it’s money invested?

Clayton, could you use this same formula for a mortgage that you've been already been paying down? Another words can I use this formula every yr for the current principal balance w/my rentals on that property? Or do I have to use the original sale price?

Thanks Clayton!

Where do you buy houses for 40k????

Not sure how realistic your investment property is. Where are there $40000 homes that can rent for $700/mo. Of course your ROI is going to be high. I would recommend using a more factual approach. Let’s say a $235000 rental with $1300/mo rent. That’s close to a 4% ROI.

do you have a downloadable excell spread sheet that is a little more specific for different senerios

Aside from asking a property manager. How can I determine the rate I can rent out a property for?

Where are you able to find such good gross ROIs in the US? Buffalo NY is the best I could find, looks to be an average of 15% gross ROI. My guess is you probably have to look pretty hard to find those deals and it's a difficult time to find them with historically low interest rates