ROI or Return on Investment is a popular key performance indicator for property investors.
ROI calculation formula
There are four stages to the ROI calculation formula:
- Calculate the annual rental income.
- Subtract your expenses, including any mortgage payments, management fees, repairs and gas safety certificates, periods without a tenant etc?
- Divide this net figure by the amount of cash invested into the property.
- Multiply by 100 to get the final percentage ROI figure.
What does ROI actually mean?
Firstly, return on investment measures how hard the cash (or equity) you invested in the property, by comparing it to the net annual income this cash generates for you.
Also, the percentage return on investment will vary according to how much cash was used to purchase the property as a percentage of the purchase price.
Consequently, that the lower the cash and the higher the debt, the higher the ROI will be. In other words, doesn’t measure the performance of all of the sums invested in the property (including the debt), but just the cash element.