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Return on investment (ROI)

Return on investment (ROI)

What is ROI?

ROI, also known as the Return on Investment, is a measurement of profitability relative to any associated costs. This ratio is useful because it helps property investors understand how their investments stack up next to each other.

How do I calculate ROI?

\[ {{Gross \, annual \, rent - Gross \, annual \, expenses} \over Purchase \, price } = ROI \]


ROI considerations

ROI is generally a helpful metric to understand when investing in properties. However, it's important to understand:

  • If other property investors or real estate agents are telling you how much ROI a property has, make sure to ask about how they are calculating ROI. There are different ways to calculate the ROI so knowing what's included will help you better understand if it's a good deal or not.
  • Your ROI may differ if you require financing. Since loans often have interest associated with it, you end up losing some money on the ROI side in exchange for more leverage (ie. the ability for you to do more deals).
  • Given taxes and associated deductions are not typically included in ROI calculations, a property with more depreciation may end up yielding more income post-tax.
  • Depending on your rental property, the ROI may not make sense in Year 1 but makes sense in the future due to appreciation and higher future rent.

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