Calculating rough ROI on rentals is easy:

(Yearly rent - yearly expenses) / Downpayment, usually 20% = ROI %

For example, let’s say one buys $500,000 single family home and rent it out for $3000 per month. Since it is investment property, they will need to make at least 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 other hand, it also ignores equity that is building in the home and any appreciation. This is very rough formula. Ideally, you want at least 10% ROI based on this formula. Otherwise, better to invest in 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 5% down payment. And let’s assume your current monthly rent is $1200 for one bedroom apartment.

Also now you can claim homestead and your taxes will be lower but on other hand you will pay PMI of about 0.5-1% of loan amount. Assuming 0.75% PMI and $8000 in property taxes now.

The new modified formula would be:

(Yearly rent from extra rooms + yearly rent of current residence - expenses) / down payment

($27,000 + $14,400 – 38,400) / 25,000 = 0.12 or 12%. That is 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.