In our series “Metrics Explained”, we will dive into two concepts that are commonplace to any seasoned real estate investor. This article about ROI is part-one of a two-part series.
Return on Investment, or ROI, is one of the best-known measurements of how much money or profit is made on a given investment. It is a ratio between net profit and cost of investment that can be stated as follows:
ROI = Gain – Cost / Cost
Though it is a simple concept, there are a number of variables you must account for to render an accurate measurement. For example, when calculating gains, you should be mindful of the time your rental property stays vacant, such as transitions between tenants, as the lack of income during that period will affect the ROI. When it comes to costs, be sure to include repair and preventative maintenance expenses, property taxes and insurance costs on top of down payments and mortgage payments.
Because the ROI is a snapshot in time of profitability, appreciation of (and sometimes depreciation) the real estate value along with tax advantages of rental can have an impact on your returns. Additionally, rents will typically go up with inflation while your mortgage payments stay the same, all of which can increase your ROI.