"What's the ROI?" is the most common question I get from new investors. It's also the most misleading one, because there are at least five different ways to measure it, and they tell you wildly different things.

Here's the actual framework.

The five returns that actually matter

1. Cash flow

The simplest metric: how much money is in your pocket each month after every expense?

Formula: Monthly rent − (mortgage + taxes + insurance + management + maintenance reserves + vacancy reserves)

If that number is negative, you're losing money every month. That doesn't automatically make it a bad deal (appreciation could offset), but it does mean you'd better have other returns doing heavy lifting.

2. Cash-on-cash return

The most useful annual metric for most investors. It tells you what percentage of your invested cash you're getting back each year.

Formula: Annual cash flow ÷ Total cash invested

Example

You put $60,000 down on a $300,000 property (down payment + closing costs + initial repairs). After all expenses, the property cash flows $4,800/year. Your cash-on-cash return is $4,800 / $60,000 = 8%. That's a decent return for a stable buy-and-hold in Houston.

3. Cap rate (capitalization rate)

What the property would return if you paid all cash. Useful for comparing properties to each other.

Formula: Net Operating Income (NOI) ÷ Purchase Price

NOI = annual rent − all operating expenses (NOT including mortgage payment). Cap rate of 6-8% is typical for Houston single-family right now. Multifamily and commercial often trade at different cap rates entirely.

4. Appreciation

The increase in property value over time. In Houston, single-family homes have averaged 4-6% annual appreciation over the long term — though year-to-year is volatile.

Where it gets interesting: appreciation is leveraged. If you put 20% down and the property appreciates 5%, your return on equity is 25% (5% on the whole value, but you only invested 20% of it).

5. Loan paydown

Every month your tenant pays the mortgage, you build equity. This is invisible return — you don't see it in cash flow — but it's real. Over a 30-year mortgage, this becomes substantial.

The total return picture

The reason real estate is such a wealth-building vehicle is that you get all five returns at once. A property might only cash flow $400/month, but if you add:

Your total annual return on a $60K investment might be $22,800. That's a 38% total return — but you'd never see that just by looking at cash flow.

What new investors get wrong

They use the wrong rent

Sellers and seller agents will quote "potential" rent. Always use comparable rent from properties actually leased in the last 6 months, not aspirational numbers.

They underestimate expenses

The rule of thumb that scares newer investors but ends up being roughly right: 50% of your gross rent will go to operating expenses (NOT including mortgage). Vacancy, repairs, management, taxes, insurance. Plan accordingly.

They forget reserves

Allocate 5-10% of monthly rent for maintenance and another 5-8% for vacancy. The HVAC will die. The roof will leak. A tenant will leave between leases. Reserves are not optional — they're operating costs you haven't paid yet.

The Test

If your projected returns only work when nothing goes wrong, the deal doesn't work. Run your numbers assuming one bad year out of every five. Does it still make sense? Then it's a real deal.

The metric I actually care about

For most clients, I focus on cash-on-cash return with conservative expense assumptions. If a deal pencils at 6%+ cash-on-cash AFTER realistic operating costs, AND it's in a neighborhood with appreciation potential, AND the property itself is sound — that's a real opportunity.

Anything less than that, in my opinion, isn't worth the headache.

Want me to run the numbers on a specific property?

Send me an address. I'll pull comparable rents, run realistic expenses, factor in the loan structure you're considering, and give you a real return picture — not the seller's fantasy version.