How to Calculate Rental Property ROI
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How to Calculate Rental Property ROI

08.21.2025 | Investing

Toronto, Ontario, is one of North America’s top real estate investment markets, boasting strong average rents and consistent city-wide demand for housing. Despite these advantages, buying an investment property requires strategic planning and execution. This includes being knowledgeable around how to calculate rental property ROI potential.

In this blog, we will offer insights on how to calculate ROI on a rental property, along with other informative tips to help you make a seamless, lucrative investment.

Searching for guidance on Toronto real estate? Our team has decades of industry experience to support your goals. Call 416.772.4723  or reach us by email at evan@christensengroup.ca.

What is ROI in Real Estate?

ROI is an acronym of ‘Return on Investment’. In real estate, ROI is an important metric used to measure the equity and/or profit earned from a particular home or property.

Given the dynamic nature of real estate, investors and homeowners can generate returns by various means, including simple appreciation, property modification, such as repairs and renovations, leasing, and eventually selling the home.


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How to Calculate Rental Property ROI

Although there are multiple avenues for generating returns, real estate investors and landlords typically build wealth through two main channels. The first being equity – built through property appreciation in the long term. The second is the income earned from renting out their property (or properties).

As these two channels generate returns differently, they require separate calculations for rental property ROI potential.

Calculating Appreciation and Resale ROI

When it comes to selling an investment property (or primary residence), there are two different methods for calculating return on investment.

The ‘Cost Method’ determines ROI by comparing the cost of the property, including the initial purchase price and any expense-incuring home improvements, with the final sale price.

As an example, if a property was purchased for $500,000 and the homeowner invested $100,000, then the cost would be $600,000. Should that property sell for $1,000,000, then the ROI would be $1,000,000 – $600,000 or $400,000.

Another way to calculate ROI when selling real estate is known as the ‘Out-of-Pocket Method’. Rather than refer to the purchase price of the property, this calculation compares the final sale amount with the specific cash amount invested in the mortgage – i.e. the down payment amount, and total mortgage contributions (including interest) made to date.

Calculating Rental Income ROI

Next, let’s analyze how to calculate rental income to determine the profitability of a particular rental property.

Your gross, or annual, rental income is the total rent collected from tenants over a 12-month period. For example, if you manage two units, each renting for $2,000 a month, then your GRI will be $4,000 x 12, or $48,000. If you’re bolstering your rentals with add-ons such as paid laundry or parking spaces, you can include income from these ventures too.

After totalling your annual income, you must subtract your costs. These include:

  1. Mortgage payments
  2. Utilities (if built in to rent)
  3. Property taxes
  4. Maintenance fees
  5. Insurance

Keep in mind that the income earned from a rental property can change. In Ontario, annual rent increases are permitted for most properties. New tenancies can also impact income as a result of rate adjustments and the costs that come with tenant turnover. As a landlord, performing annual ROI analyses can ensure your investment remains on the right track.

ROI on Short Term Rentals

While many property owners stick to the traditional tenancy model, short term rental properties have become an increasingly prominent method of investment in Toronto, largely due to the popularity of platforms such as Airbnb and Vrbo.

Although the model offers certain advantages, short term rentals are subject to a range of regulations, restrictions, and taxation – all of which impact rental property ROI. Specifically, Toronto’s Municipal Accommodation Tax (MAT), levied against certain properties, can pose significant drawbacks to your returns.

To that end, if you are weighing the advantages of operating a long term rental property versus a short term rental property, taxation must be part of your rental property ROI calculations. If you need additional guidance about investment or real estate-related taxes, it’s best to consult an expert, such as an accountant or real estate professional.


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Invest With Christensen Real Estate Group

Real estate in Toronto is notoriously competitive. For an investment with maximal returns and minimal labour input, you won’t want to navigate the market on your own.

Boasting over four decades of experience in West Toronto, Christensen Real Estate Group is your best resource for sourcing and securing a profitable income property. As investors and landlords ourselves, we can provide you with critical advice on ROI-optimization, as well as other factors such as tenant sourcing and communication, relevant regulations, and more.

Searching for guidance on Toronto real estate? Our team has decades of industry experience to support your goals. Call 416.772.4723  or reach us by email at evan@christensengroup.ca.

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