What Is Roi In Real Estate And How To Calculate It

What is exactly is ROI and how do you calculate, in this video we are going to break it down. My favorite way to do this, is by using examples and going step by step, so the goal Is that you walk away from this video, knowing exactly how to use the formula, and why you need to use it.

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1. First Let’s talk about the Definition
– ROI stands for return on investment
– And it’s a metric that helps us see if our investments are performing as expected
– But not just our current investments but also our future investments

For example:
– Before you buy an asset you want to calculate return on investments to make sure that compared to other deals, you are getting a good return

Formula:
– (Net Return/Cost of investment)*100 = ROI

2. So lets run this formula and see how it works

First Lets calculate the Cost of the Investment
– So I want to buy a piece of real estate
– Asset cost about 100k, and closing cost is another $6,000
– So I’m all into this deal for about 106,000

Second, let’s calculate the Net Return on the assets
– It’s a single-family home and I can rent it for about $1000 a month
– Mortgage Free, taxes $100, insurance $100, $200 for maintenance
– Gross income is $1000- expenses of $400, I have a net income of about $600

So let’s calculate
– Per month I keep $600 in my pocket, per year that’s about $7200
– The cost of the property is 106k
– So $7200/106k *100 = 6.8% rounded up

3. Why is it important that I run these numbers
– Well I want to use that metric, to compare to other investments
– If I put 106k into the stock market I can make about 10% annually without any of the management issues
– If I bought the property down the street selling for 70k that needs 10k in rehab, I could have been in 80k ( and my return on investment would have been 9%

Why is this important:
– It helps you how good of an investment you are making, anything above 8% for me when you pay all cash is great
– Because remember you have to taxes on the income and worry about inflation

But?
– What If the property cost 80k and I have 16k in equity
– What is my return on that
– Well we call that return on equity and that’s another video for another day

Ps. When we pay in cash for real estate and we want to run the math, they call it Cash on cash return, because you didn’t borrow money.

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*Some of the links and other products that appear on this video are from companies in which Tommy Bryson will earn an affiliate commission or referral bonus. Tommy Bryson is part of an affiliate network and receives compensation for sending traffic to partner sites. The content in this video is accurate as of the posting date. Some of the offers mentioned may no longer be available. I’m an Accountant but I’m not your Accountant, always review information with your Accountant/CPA and your Financial Advisor.

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