Understanding how to calculate ROI in property is a must for landlords aiming to assess the profitability of their buy-to-let investments. 

ROI, or Return on Investment, measures how much profit a property generates relative to the total costs involved.

Knowing what constitutes a good ROI and how to improve it can help you make more informed decisions and maximise your returns. 

It’s important to distinguish ROI from rental yield – while rental yield focuses on annual rental income, ROI considers the overall return on the money you’ve invested.

1. How to calculate rental property ROI
2. What is a good return on investment for rental property?
3. Tax implications

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How to calculate rental property ROI

To work out the ROI for a rental property, start by adding up your annual rental income. 

Then, subtract all your expenses, like mortgage payments, management fees, repairs, services, and any time the property is empty.

Take what’s left (your net income), divide it by the cash you put into the property, and multiply by 100 to get your ROI as a percentage.

When we say “cash you put in,” we mean your own money, not the mortgage. For example, if you bought a property for £400,000 in London using a £250,000 buy to let mortgage and £150,000 of your own cash, your cash investment for calculating ROI is £150,000.

Calculating ROI with a mortgage

Let’s take a £400,000 property in London and work out the ROI, assuming you took out a £250,000 mortgage.

• Monthly rent: £2,000
• Annual rent: £2,000 × 12 = £24,000
• Annual costs, including mortgage repayments:
  • Mortgage payments: £10,000
  • Repairs and maintenance: £1,500
  • Insurance and other expenses: £500
  • Total annual costs = £10,000 + £1,500 + £500 = £12,000
  • Net annual profit: £24,000 (rent) – £12,000 (costs) = £12,000
• Purchase price: £400,000
• Mortgage used: £250,000
• Cash invested: £150,000

ROI is calculated by dividing the net annual profit (£12,000) by the cash invested (£150,000) and then multiplying by 100, giving a return of 8%.

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Calculating ROI without a mortgage

This time, let’s use the same £400,000 property, but assume it was purchased outright with no mortgage. The calculation now looks like this:

• Annual rent: £24,000
• Annual costs without a mortgage: £2,000 (including maintenance, property management, insurance, etc.)
• Net annual profit: £24,000 (rent) – £2,000 (costs) = £22,000
• Purchase price: £400,000
• Mortgage used: £0
• Cash invested: £400,000

ROI is now calculated by dividing the net annual profit (£22,000) by the cash invested (£400,000) and then multiplying by 100, giving a return of 5.5%.

You can see that your ROI is much lower in the second example without a mortgage (5.5%) compared with the first example where you invested less with a mortgage (8%).

What is a good return on investment for rental property?

As seen with the £400,000 property example, your ROI can vary significantly based on the way you choose to invest.

So, what’s considered a good ROI for a rental property, especially when the two ROIs in our example are quite different?

The key takeaway is that your ROI should be positive, indicating you’re making a profit. Whether this is deemed “good” depends on your investment goals.

For those investing for the long term, such as using rental income to support a future pension, a lower ROI in the short term may be perfectly acceptable.

If you have a repayment buy to let mortgage set to be cleared within 15 years, for instance, your ROI will improve as the mortgage is paid off.

Once that happens, your ROI will look much stronger, as mortgage costs will no longer be a factor. For example:

• Annual rent: £24,000
• Annual costs (now without mortgage repayments): £2,000
• Net annual profit: £24,000 (rent) – £2,000 (costs) = £22,000
• Purchase price: £400,000
• Mortgage used: £250,000 (mortgage is now paid off)
• Cash invested: £150,000 (total initial investment)

ROI is now calculated by dividing the net annual profit of (£22,000) by the initial cash invested (£150,000) and then multiplying by 100, giving a return of 14.6%.

By any standard, that’s a solid ROI. In reality, however, the situation would be even better, as you’ve now built up significant additional capital in the property – specifically the £250,000 once the mortgage is paid off.

Moreover, you’d benefit from any increase in property value if you decide to sell, although it’s important to remember that you’d be subject to capital gains tax on the profit.

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Tax implications

Income tax and capital gains tax

When looking at your returns, remember that the examples given are before tax. It’s important to factor in income tax when assessing any investment. Your rental profits will be taxed at your marginal rate.

If you’re already a higher-rate taxpayer, or if your rental income pushes you into that bracket, you could pay 40% or 45% tax on your profit.

If you pay interest on a buy to let mortgage, you are no longer able to use the full amount of this interest to reduce your profits and tax bill, but you can usually still receive a tax credit of 20% on the amount paid in interest.

 If you have no other income, you may be able to use your personal allowance (currently up to £12,570) to cover all of your rental profits.

Full details of taxation for landlords can be found on the government’s website and you may wish to take independent advice from an accountant if you are unsure of how the income from your rental property will be taxed.

Capital growth and selling your property

If you’ve built up a property portfolio, you might decide to sell one or more properties to free up cash – perhaps to add to your pension pot or invest in low-risk options as retirement approaches.

Before you sell, make sure to factor in any capital gains tax you’ll need to pay. If you’ve owned the property for several years, it’s unlikely the value will have gone down (unless the market has taken a major hit).

In most cases, you’ll sell for significantly more than you paid. Keep in mind, CGT on property sales is charged at 18% for basic-rate taxpayers and 24% for higher and additional-rate taxpayers for profits in excess of an annual allowance which is currently £3,000 per year (figures correct as of November 2024).