Understanding ROI

• ROI can be considered to be the equivalent to the interest you are paid on a CD or a bond. Another way to think of ROI is the profit you are making from running your real estate business. However, just like any other business, you can't make a profit until you are open for business, and in the case of ROI for real estate this means leasing the property to a tenant.
  
  

Calculating ROI

• ROI is typically calculated as a percentage on a time basis. That is, the net profit in dollars is converted to a percentage by dividing it by the total amount invested. For example, let's say you paid $100,000 for a house you are renting for $1,000 a month. After taxes, upkeep and other expenses you net $600 a month. Over 12 months that would add up to $7,200 a year in net profit. Divide the $7,200 net profit by $100,000 and you are making a 7.2 percent annual ROI.
  
  

Calculating Long-term ROI

• ROI can also be calculated on a long-term basis using certain assumptions. For simplicity's sake, let's use the previous example and assume that you raise the rent by exactly the amount your expenses increase so that your annual ROI remains at 7.2 percent. In 10 years you will have made $72,000, and in 20 years you will have made $144,000, for a $44,000 profit after subtracting your $100,000 original investment. Then, you sell the house for $150,000. Adding the $44,000 rental income profit to the proceeds of selling the house, you would make a total profit of $194,000 or 194 percent total ROI over the life of the investment.
  
  

Getting a Return on Investment ASAP

• The best way to get ROI as soon as possible on property you purchase for an investment income is to buy real estate that is ready for immediate occupation or use. You can't make money until you get a tenant, so the more time you have to spend renovating or otherwise making the property ready to produce income, the longer until you can begin making a return on your investment. However, in some cases it might be worth it to give up a month or two of rent if you are saving a lot of money up front buying a property that needs significant repairs.