# ROI doesn’t include equity ?

7 Replies

Hey everyone, I was working on my spreadsheet and I was looking at ROI, and I wanted to understand it fully. So I understand that ROI is your profit (income-mortgage-expenses) divides by total initial investment (maybe down payment+closing costs). So let’s say I’m renting it out and building equity, how how does equity come into play. Once the house is paid off does that mean I get a 108% ROI (if my original ROI is 8%?) Thanks in advance! Peter

No you would not have 108% ROI you would have a 100% return of capital and the. Whatever money made over that would be your return on investment.

You also may want to look into return on equity, cash on cash return, and discounted cash flow analysis

To factor in appreciation, principal paydown, tax benefits, you'll want to figure your IRR. ROI, COC and all that are just one metric or one snapshot of your overall IRR journey. Bad metaphor maybe, but to me IRR is key.

An example might be a 30yr vs 15 yr loan. I will forego \$300/mo in extra 'cashflow' for a principal paydown of an extra \$1000/mo. The net to my balance sheet is + \$700/mo, but it kills my ROI. IRR will be more accurate and what matters in the end.

I can have a net zero COC but an IRR of over 40%+ per year at exit on a 3yr hold sometimes. You'll have those opportunities in CA as well. Focus on and learn about the IRR!

ROI is based on original DP and will not be of any value past your first year of ownership due to principal pay down and appreciation.

@Peter Bui
If your looking at a rental and long term hold(more than 12 months) you should be calculating the yield and not ROI as the yield (or IRR) is essentially the interest rate on your \$.

@Steve Vaughan , thanks for the detailed description. That actually helps a lot! I appreciate you taking the time to draft a detailed response. I'll look into how to calculate IRR!

ROI, means return on investment and does not consider down payment, equity percentage, or if funds used for investment were borrowed, stolen or gifted or traded for equity. You don't factor mortgage payments or interest in ROI.