Real Estate

Return on Investment - ROI

What is the out-of-pocket method to calculate a return on investment in real estate?

When you purchase real property using a loan, you leverage the use of the bank or mortgage company’s capital in order to invest. In so doing, your cash outflow to acquire the property may be lower than if you paid cash for the property, and your ROI may be higher as a result. Using loans or leverage enables you to obtain the returns you require when you eventually sell the property. Using the same values as in the above example, if you purchase a property for $100,000, make a down payment on a loan for $20,000, and spend $50,000 in additional capital to renovate the property, your total out-of-pocket expenses are $70,000. If you sell the property for $200,000, your equity is $130,000. Accordingly, your ROI will be calculated as above, $130,000 (equity) divided by $200,000 (your sales price), which equals 0.65, or 65%, improving your ROI.


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