How to calculate the ROI of an investment property step by step

The return on a property investment is not a single number — it is at least four, and the gap between them can be several percentage points. The problem is that most listings and articles use the most flattering one (gross yield) and stay silent about the rest. This article will not do that. We will calculate all four metrics with a real example and explain which matters for your profile.

The four metrics, explained

• Gross yield: annual rent / purchase price × 100. Deducts nothing. The headline figure.
• Net yield: (annual rent − annual expenses) / purchase price × 100. Deducts running costs but not acquisition costs.
• Real ROI: (annual rent − annual expenses) / total investment × 100. The denominator includes purchase price + all acquisition costs (taxes, notary, registry, legal fees, renovation).
• Cash-on-cash return: net annual cash flow / own capital invested × 100. Only relevant when buying with a mortgage — it measures what your money earns, not the bank's.

The example: a flat in El Campello

Property details:

• Type: 2-bedroom apartment, 75 m², 5 minutes from the tram
• Purchase price: €150 000
• Condition: habitable, needs cosmetic renovation (paint, kitchen, bathroom)
• Goal: long-term letting

Step 1 — Calculate total investment

The purchase price is not what you pay. To the €150 000 you must add:

• ITP (Transfer Tax): 10 % in the Valencian Community for resale = €15 000
• Notary: ~€800
• Land Registry: ~€400
• Legal fees: ~€500
• Cosmetic renovation: €12 000 (paint, new kitchen, bathroom fittings, flooring)

Total investment: €178 700

Those additional €28 700 represent 19.1 % on top of the purchase price. That is the difference between the listing price and what actually leaves your pocket.

Step 2 — Estimate annual rent

Research the local market: check portals like Idealista or Fotocasa for comparable flats in the area (same size, condition and location).

For our example:

• Estimated monthly rent post-renovation: €750
• Annual gross rent: €9 000

Step 3 — Calculate gross yield

Formula: annual rent / purchase price × 100

9 000 / 150 000 × 100 = 6.0 %

This is the figure you will see in headlines. But it is not what you actually earn.

Step 4 — Calculate annual expenses

Full list of recurring costs:

• IBI (property tax): €450/year
• Community fees: €65/month = €780/year
• Home insurance: €250/year
• Rental non-payment insurance: €270/year (3 % of rent)
• Maintenance and repairs: €1 500/year (1 % of property value)
• Estimated void: 5 % of rent = €450/year
• Management (if using agency): €0 (self-managed in this example)

Total annual expenses: €3 700

Step 5 — Calculate net yield

Formula: (annual rent − annual expenses) / purchase price × 100

(9 000 − 3 700) / 150 000 × 100 = 3.5 %

The gap from gross is 2.5 percentage points. On a €150 000 property, that is €3 750 a year that does not exist in reality but does in the brochure.

Step 6 — Calculate real ROI

Formula: (annual rent − annual expenses) / total investment × 100

(9 000 − 3 700) / 178 700 × 100 = 3.0 %

Real ROI includes acquisition costs and renovation in the denominator. It is the most honest metric, and the one you should use to compare with other investments (deposits, funds, bonds).

Step 7 — Calculate cash-on-cash (with mortgage)

Assume you finance part of the purchase:

• Mortgage: €100 000 at 3.5 % over 25 years → monthly payment: ~€500
• Own capital: €78 700 (price − mortgage + acquisition costs + renovation)
• Annual mortgage cost: €6 000

Net cash flow = rent − expenses − mortgage = 9 000 − 3 700 − 6 000 = −€700

Cash-on-cash = −700 / 78 700 × 100 = −0.9 %

Yes, negative. With these numbers, the mortgage absorbs all cash flow and a bit more. It does not mean the investment is bad — you are building equity through loan amortisation and potential appreciation — but it does not generate free cash flow.

For cash-on-cash to be positive with a mortgage, you need one of three things: higher rent, lower costs or a smaller mortgage (larger deposit).

Step 8 — Include appreciation (total return)

The most complete calculation includes property appreciation:

• Estimated annual appreciation: 5 % (conservative for the Costa Blanca in 2025)
• Annual capital gain: 150 000 × 5 % = €7 500
• Total return = net cash flow + capital gain = 5 300 + 7 500 = €12 800
• Total return on investment: 12 800 / 178 700 × 100 = 7.2 %

Appreciation transforms a 3 % net yield into a 7.2 % total return. But remember: appreciation is not liquid (you do not collect it until you sell) and it is not guaranteed.

Example summary

The same flat, four different numbers:

• Gross: 6.0 % — the listing figure
• Net: 3.5 % — the day-to-day figure
• Real ROI: 3.0 % — the truth figure
• Cash-on-cash (with mortgage): −0.9 % — the bank figure
• Total return (with appreciation): 7.2 % — the informed optimist figure

What is a good ROI in Spain?

• Net ROI 4-6 %: good — beats deposits and bonds without excessive risk.
• Net ROI 6-8 %: very good — typical of areas with low prices and high demand (Torrevieja, Guardamar).
• Net ROI >8 %: excellent, but verify the numbers do not hide costs or risks. If it looks too good, it probably is.
• Net ROI <3 %: questionable as an income investment, only justifiable if expected appreciation is high.

Common calculation mistakes

• Using gross as if it were net. The most common error. The difference is usually 2-3 percentage points.
• Forgetting acquisition costs. ITP (10 %) plus notary, registry and legal fees add 11-13 % to the price. Money that leaves your pocket and is never directly recovered.
• Not budgeting for voids. Even with good occupancy, budget 5-10 % annual void.
• Ignoring maintenance. Properties need repairs. 1 % of value per year is a prudent minimum.
• Confusing cash flow with return. A flat that does not generate cash can be a good investment (through appreciation), but you need another income source to cover the monthly shortfall.

Frequently asked questions

Should I include renovation in the ROI calculation?

Yes, always. Renovation is part of your total investment. A flat you buy for €120 000 and renovate for €30 000 is a €150 000 investment plus acquisition costs. Calculating yield on the €120 000 is self-deception.

How do I estimate rent before buying?

Search for comparable flats (same area, size and condition) on Idealista and Fotocasa. Filter by recently let if possible. Asking prices are usually 5-10 % above actual contract prices. Speaking with local agents gives you the most reliable figure.

Can ITP be negotiated or reduced?

No. ITP is a fixed regional tax. In the Valencian Community it is 10 % for resale property. For new builds you pay VAT (10 %) + AJD (1.5 %). Some profiles (under 35, large families) may qualify for regional reductions — consult a tax adviser.

How does inflation affect ROI?

Inflation has a dual effect. It erodes the real value of cash flow (the euros you collect buy less), but favours the mortgaged owner (debt loses real value) and tends to push up property values and rents. Long-term, property investment is generally a good inflation hedge.

How often should I recalculate?

At least once a year. Review market rent, update actual expenses and recalculate. If net yield falls below your minimum threshold, assess whether to raise rent, cut costs or sell and reinvest.

If you are evaluating a property investment on the Costa Blanca, explore our available properties or contact us for a personalised consultation.