Calculating rough ROI on rentals is easy:
For example, let’s say one buys a $500,000 single-family home and rents it out for $3000 per month. Since it is an investment property, they will need to make at least a 20% down payment. On $400,000 loan, their monthly payment would be about $2750 at 3.25% interest rate, with $10,000 in property taxes per year and $2000 yearly insurance.
($36,000 - $33,000) / $100,000 = 0.03 or 3% return.
Of course, this ignores vacancies and any maintenance expenses. On the other hand, it also ignores the equity that is building in the home and any appreciation. This is a very rough formula. Ideally, you want at least a 10% ROI based on this formula. Otherwise, it is better to invest in the market.
What if you live there and rent out extra rooms? Let’s say this home has 4 bedrooms. You charge $750 per room. And since this is your primary residence, you can make only a 5% down payment. And let’s assume your current monthly rent is $1200 for a one-bedroom apartment.
Also, now you can claim homestead and your taxes will be lower, but on the other hand you will pay PMI of about 0.5-1% of the loan amount. Assuming 0.75% PMI and $8000 in property taxes now.
The new modified formula would be:
($27,000 + $14,400 - 38,400) / 25,000 = 0.12 or 12%. That is a pretty decent ROI. Again it doesn’t include vacancies and other expenses but also doesn’t count any equity or appreciation of the home value.