Return On Investment (ROI)
Definition of "Return on investment (ROI)"
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.
Or:
- $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%
Popular Real Estate Terms
An opening that lets the outside air come in or out of a structure. A ventilation fan lets the structure have access to outside air when the switch is in open position. ...
The term collusion may make you think about colluding from the start, and you wouldn’t be far from the truth. The definition of collusion is a secret, non-competitive, and, at times, ...
Choosing alternative real estate investment instruments having different risk-return features. Diversification can be done by regions and types of real estate. Diversification provides a ...
Usual operating service life of property for the purpose it was acquired. The useful life used for depreciation accounting does not necessarily coincide with the actual physical life or any ...
A scholar second mortgage definition would go something like: a loan with a second-priority claim against a property in the event that the borrower defaults. But that’s too stiff, ...
Compilation of all tax maps of a given tax district that are bound together and kept at the local tax office. The tax book is a public record that may be accessed by an individual for ...
I am the person. The person himself/herself. The actual person. ...
An estate which descends to heirs in perpetuum. In an estate of inheritance, the current tenant not only has the right to enjoy the property for life, buy his or her tenancy rights pass to ...
Transactions taking place between individuals who are alive rather than when one of the parties is either dead (e.g., estate) or is contemplating death. For example, a deed may transfer ...
Have a question or comment?
We're here to help.