Return On Investment (ROI)

Definition of "Return on investment (ROI)"

Jason Treco real estate agent

Written by

Jason Trecoelite badge icon

eXp Realty

In order to define the rate of return on investment, or more commonly known as ROI we are also going to explain how it can be calculated and what to look for in the return rate. Investing in property can sometimes be a gamble but if you understand what is the rate of return(ROI), how to calculate it and what is a good rate of return, then your investment should be in good hands.

The definition of return on investment (ROI) examines the profit that investment can bring in percentage from the initial expenses from that investment. A calculated ROI can be related to stocks, real estate, savings accounts or bonds. It helps investors in making better assessments of the potential profit of an investment and whether it is a good investment or not.

The Formula for ROI

In order to calculate the ROI of an investment you take the total return of the investment and divide it from the original cost of investment. You will get a value that represents the percentage of that profit so you multiply it by 100 and add the %.

ROI = ( return on investment / cost of investment ) x 100

ROI = 0.0XX%

There are 4 easy steps to calculate ROI:

  • Add up your purchasing investment to any additional costs of the purchase and other investments in the property (remodeling, renovations).
  • Separately add up your annual income from your rental property.
  • From the annual income you take out the annual expenses (property taxes, insurance, monthly expenses) and that gives you the annual return.
  • Divide your annual return by the total initial investment and you’ll get the ROI represented in percentage.

Example of how to calculate the ROI:

  • You buy a $200,000 house, and assume the closing costs for the real estate agency would be at about $2,000, remodeling at $18,000. Adding this up we get an initial investment of $220,000.
  • The monthly rent for the property is $2,000 and from 12 months you get $24,000. 
  • From the annual income you take out the monthly expenses of $400/month and get an annual return of $19,200 ($24,000-$4,800)
  • Now you divide $19,200 by $220,000 and get 0.087 or 8.7%. This is your ROI.


  • $200,000 + $2,000 + $18,000 = $220,000 (cost of investment)
  • $2,000 x 12 (months) = $24,000
  • $24,000 -  ( $400 x 12 (months)) = $19,200 (annual return)
  • $19,200 / $220,000 = 0,087 or 8,7%

image of a real estate dictionary page

Have a question or comment?

We're here to help.

*** Your email address will remain confidential.


Popular Real Estate Terms

(1) Individual or business that is engaged to do some sort of construction work for another for a fee. There are basically three types of contracting: A general contractor enters into a ...

In an electrical system, the connection box where all the circuit systems are installed with a series of electrical breakers. The major distribution or collection duct in an ...

In an adjustable rate mortgage (ARM), the maximum rate that can be charged during the mortgage period. For example, John obtained an $80,000 6% ARM having a lifetime rate cap of 10.5%. ...

tenancy having no written lease or contract. A periodic tenancy can be on a month-to-month or week-t-week basis. ...

When a real estate owner wants to know what their property tax liability is, they calculate the assessment ratio for their property. An assessment ration is a relationship between a real ...

Percentage of rental property that is unoccupied. For example, a vacancy rate of 25% means that 25% of the rental unites are nor being used. Idle space can cause a significant cash drain ...

Property taken over by the government because the owner has failed to pay taxes on it. The property may revert back to the owner when the taxes are paid. If not, the government may sell the ...

Clause inserted into a commercial lease by a mortgagee stating the lessee's current lease will not be terminated if there is a foreclosure action against the landlord for the failure to ...

A void property is a real estate property that is immediately available for new owners or renters as it is vacated. Void real estate properties can be occupied at a short notice as no ...

Popular Real Estate Questions