Return on Investment (ROI) in real estate measures the profit or gain an investor makes relative to the money invested in a property. It's a key performance indicator that helps determine whether a real estate investment is worthwhile. The basic formula is:
ROI = (Net Profit ÷ Total Investment) x 100
For example, if you invested $100,000 into a rental property and earned $15,000 in net profit over the year, your ROI would be 15%.
In real estate, ROI can be calculated in different ways depending on the investor's strategy. For rental properties, ROI typically considers net income after expenses such as mortgage payments, taxes, insurance, and maintenance. For fix-and-flip projects, ROI is based on the profit made from the sale after renovation costs and purchase price.
A strong ROI means your investment is working efficiently to generate income or grow in value. However, factors such as property location, market conditions, rental demand, and financing can all impact ROI. It's important to look beyond the numbers and evaluate both the short-term returns and long-term appreciation potential to fully understand an investment's overall value.