Property Investment in today's modern world
What Is ROI in Real Estate?
First and foremost, we would like to focus on the definition of ROI in investing.
Return on investment (ROI) is a type of financial metric—a formula—which acts as a helpful tool for investors when it comes to their strategic planning. In simple terms, it helps real estate investor plan for and predict the "financial outcome" of their investment.
As noted, by focusing on ROI real estate, the investor can view their potential profit margin if they choose to invest in real estate by buying property and renting it out or flipping houses—depending on their preferred strategy. With that in mind, ROI is a metric that is of crucial value to the investor—regardless of their previous experience in real estate.
Return on investment is realized in percentages, and it is closely related to Return on Assets (ROA) and Return on Equity (ROE). However, our focus today is mainly on helping investors maximize their ROI. So, we'll leave the discussion about ROA and ROE for another time.
The Formula for Calculating ROI
Given our previous points, the next step will be using the real estate ROI formula in practice and seeing how it is calculated:
To calculate your return on investment, you essentially need to divide the amount of money you’ve earned from the investment—commonly known as your net profit—by the cost of the investment and then multiply that by a 100.
Here’s the formula outlined:
ROI = (Net Profit / Cost of Investment) x 100
It's worth noting that there's another way of calculating the ROI:
ROI = (Present Value – Cost of Investment / Cost of Investment) x 100
Now that you get the foundations of the formula, how do you use it?
The ROI calculator real estate is used by investors in order to evaluate their portfolios—or it can be applied to precisely assess different types of expenditures.
What's also essential for investors to know is that the result of ROI is only as accurate as the numbers you put into the calculation. The return on investment formula alone can't eliminate or take into account risk and uncertainty. So, if you're using the real estate ROI for assessing your future investments, you will need to take into account the risk factor separately. You need not be too pessimistic or too optimistic here.