In today’s Canadian real estate market, is it possible to maximize your investment returns? Gone are the days of easy money floating throughout the national economy thanks to the Bank of Canada’s (BoC) historically low interest rates, fuelling the 2020-2021 housing boom that led to exorbitant residential property valuations. The subsequent rise in interest rates has transformed the real estate landscape, making borrowing more expensive and dampening speculative buying activity. This shift has created opportunities for calculated, disciplined investors who emphasize long-term planning and strategic property selection. Now that conditions have normalized, investors need to get back to basics to achieve success in these pursuits. As all investments go, every investor seeks to make the best returns possible. Here’s how to calculate the ROI from a rental property.
Return on investment (ROI) is an assessment of an investment’s cash flow (how much did you put in, and how much are you getting back in return?). In real estate, ROI is not just a number—it’s a holistic measure of profitability that considers income and costs, helping investors gauge whether their properties meet their financial expectations. Experienced investors know that calculating the ROI from their properties is vital to determining how well their investments are performing overall.
Despite there being many ways to determine a property’s ROI, calculating the ROI can be as simple as using a fairly standardized formula. The ROI of a property can be equal to its annual profits, determined after its expenses, divided by the cost of the investment.
ROI = net income (gross income – costs) ÷ costs
For example, a property may have cost $50,000 to acquire. This property generates a profit of $6,000 per year, minus all of its yearly expenses. As a result, the ROI of this property is 12 percent. In short, one of the ways of calculating the ROI of a property is to divide the property’s net income by the amount invested in the property.
However, determining the ROI of a property involves calculating both the income and cost of the investment. To do this, you need to consider a number of different financial factors that contribute to a property’s ROI.
What Factors Affect the ROI from Rental Properties?
Understanding the factors that influence the ROI from rental property or other real estate investments is crucial for maximizing profitability. ROI is affected by a variety of elements that go beyond just the purchase price and rental income of a property, and each plays a pivotal role in determining whether a real estate investment will yield strong returns or fall short of expectations. Key factors include:
- Debt (mortgage or loans)
- Interest rates
- Tax and insurance
- Maintenance and rehabilitation
- Equity
- Rental income
Interest rates continue to play a crucial role in shaping the ROI from rental property investments, as they remain elevated following the sharp increases of recent years. While the Bank of Canada (BoC) had previously signalled a “higher for longer” rate environment, 2025 brings a more nuanced outlook. Although some rate reductions have offered slight relief to investors, borrowing costs are still significantly higher than they were a few years ago. As market conditions evolve, investors need to stay informed and adapt their strategies to account for these ongoing financial shifts, ensuring their property investments remain profitable.
Debt
To calculate the ROI of your properties, you first have to determine the total cost of your investment. While some investors may have paid out-of-pocket when purchasing a property, others may have received financial assistance in the form of mortgages and loans.
One of the most significant costs of a property investment is any debt paid or to be paid throughout the course of your investment. Be it a monthly mortgage payment or loan, these financial expenses are crucial to calculating your ROI since these payments are deducted from your property’s gross income to determine the net income.
Things like the amount that the bank has provided you, the term of the loan, and its interest rate are among the essential considerations that need to be made when calculating the net income. Knowing these particular details can accurately calculate the ROI of your property as time passes.
Tax and Insurance
Property tax and insurance are essential factors in determining a property’s ROI. This is because taxes and insurance are among the numerous expenses that need to be accounted for when calculating ROI. Failing to account for them can lead to underestimating expenses, which in turn affects the overall profitability of your investment property.
Both property tax and insurance are similar in the sense that they vary between property, city, and province. There are two expenses whose determination involves a third party—be it an insurance company or a provincial property assessment organization. For example, calculating your annual property tax requires an assessment from a provincial organization to determine the value of your property, which is then multiplied by the total tax rate. In contrast, a particular insurance company determines an insurance rate.
Maintenance and Rehabilitation
You’ve probably encountered repairs or renovations throughout your many real estate investments. From fixing faulty plumbing to rewiring shoddy electrical work, repairs are common for investors—especially those who use house flipping to generate quick profits. Professional repairs aren’t necessarily cheap; depending on the repairs needed for a specific property, this expense can be pretty costly.
Renovations, on the other hand, are typically used by all investors who seek to increase the value of a property with the intention of selling it at a higher price. Rehabilitation encompasses the various expenses, including repairs and renovations, that are used to ‘rehabilitate’ the property and increase its value.
On top of that, electrical and plumbing systems need to be routinely maintained to ensure that amenities remain functional. This is why maintenance and rehabilitation costs need to be considered when determining a property’s ROI.
Equity
As all property owners know, properties can change in value over time. Ideally, any real estate investor would want to build equity within their properties, which is done as investors pay off their loans or mortgages and their property’s market value increases.
This is obviously crucial to investors since the higher the equity, the more money investors are able to use for future investments. Property equity is a critical factor in determining a property’s ROI, as it is a result of paying off loans, which is attributed to the increased income of a property.
Another method, known as the cost method, involves calculating a property’s ROI by dividing the equity of a property by its costs. However, property equity must first be calculated. This is done by subtracting the total cost of the property from its market value.
For example, a property may have been acquired for $300,000. Renovations and repairs cost investors roughly $25,000, which increased the market value of the property to $400,000. With the total cost of this property being $325,000, the equity would be worth $75,000.
Therefore, the ROI can be calculated using the cost method by dividing the property’s equity by its cost. In that case, the ROI in the above example would be calculated as follows:
ROI = $75,000 (equity) ÷ $325,000 (cost) = 23 per cent
Rental Income
Tenants are typically a property’s primary source of income. The number of tenants that are renting out your property, the amount you charge your tenants, and the frequency at which you charge them—be it monthly or annual—all contribute to your property’s income, directly influencing the ROI from rental property investments. For example, properties in high-demand areas often allow landlords to charge premium rents, which can significantly boost income and improve overall returns. Therefore, having an occupancy rate that is close to 100 percent, with each occupant helping you generate a suitable monthly or annual income, is critical to receiving a better ROI from rental property investments and increasing profits.
While there are myriad ways to calculate ROI from rental property investments, there are various factors that need to be considered to determine it accurately. These factors include property maintenance costs, vacancies, property taxes, and even local economic conditions that influence rental demand. Ignoring these elements can lead to overestimating or underestimating the true profitability of your investment. Luckily for you, numerous online resources, like this ROI calculator for real estate property, help provide experienced and novice investors with the information they need.
Know Your ROI
In the end, it is vital to know your ROI when delving into the world of real estate investing. By calculating your return on investment, you can make accurate and smart decisions while maximizing your profits. Without this key piece of knowledge, you could end up investing in residential properties that will drain your wallet or perhaps prevent you from gaining access to better real estate deals out there that can accelerate your income-generation opportunities.
So, moving forward, do your due diligence, crunch the numbers, and calculate your ROI before buying or selling a property. When you prioritize ROI analysis, you position yourself to make data-driven decisions, mitigate risks, and unlock the full potential of your investments. This will make you a confident and successful real estate investor.
