How to Calculate ROI for Real Estate Investments

Return on Investment (ROI) is the ultimate metric for any real estate investor. It tells you how efficiently your dollars are working. But calculating it correctly can be tricky depending on how you financed the property.

The Basic ROI Formula

The simplest way to calculate ROI is:

ROI = (Net Profit / Total Investment) x 100

For example, if you buy a property for $100,000 cash and sell it for $120,000, your profit is $20,000. Your ROI is ($20,000 / $100,000) x 100 = 20%.

Cash-on-Cash Return

Most investors use mortgages. In this case, "Total Investment" is just your down payment and closing costs, not the total property price. This often leads to a much higher ROI percentage due to leverage.

Factors that lower ROI

Don't forget to deduct expenses before calculating profit. Maintenance, vacancy rates (usually estimated at 5-10%), property taxes, and insurance all eat into your net profit.