How total ROI is calculated
ROI = (Cash flow + Loan paydown + Appreciation) ÷ Cash invested
Every mortgage payment reduces the balance a little, which builds equity. Appreciation adds more. Neither puts cash in your pocket today, but both grow your net worth, and together they often outweigh cash flow.
Example
You put $75,000 into a $250,000 rental: 25% down plus closing costs and repairs. In the first year it produces $3,631 of cash flow, the loan balance drops by $1,905, and 3% appreciation adds $7,500 of value. Total return is $13,035, a 17.4% first-year ROI.
Be careful with appreciation
Appreciation is the least certain part of the return. Many investors run the numbers with 0% to see whether the deal works on cash flow and paydown alone.
Common questions
Does this include tax benefits?
No. Depreciation can reduce your taxes significantly, but it depends on your situation, so it's left out of this calculation.
Why does loan paydown grow over time?
Early payments are mostly interest. As the balance falls, more of each payment goes to principal.