how to calculate ROI on real estate investments

Posted 2025-06-21 05:22:38

ROI (Return on Investment) tells you how much profit you’re making—or could make—on a real estate investment relative to the money you put into it. Whether you're buying a rental property, flipping a house, or doing BRRRR, knowing how to calculate ROI helps you make smart, profitable decisions.

Here’s a simple step-by-step breakdown:

🧮 What Is ROI in Real Estate?

ROI = (Net Profit ÷ Total Investment) × 100

It’s expressed as a percentage and helps you compare different investments side-by-side.

✅ Step-by-Step ROI Formula for a Rental Property

1. Start with Annual Net Profit

Net Profit =
Gross Rental Income – Operating Expenses – Mortgage Payments

Example:

Item	Amount
Gross Rent (Monthly)	₹25,000
Operating Costs (taxes, insurance, repairs, etc.)	₹5,000
Mortgage (principal + interest)	₹12,000

→ Monthly Cash Flow = ₹25,000 – ₹5,000 – ₹12,000 = ₹8,000
→ Annual Net Profit = ₹8,000 × 12 = ₹96,000

2. Calculate Your Total Investment

Total Investment =
Down Payment + Closing Costs + Repairs/Renovations

Example:

Cost Type	Amount
Down Payment	₹500,000
Closing Costs	₹50,000
Renovations	₹100,000

→ Total Investment = ₹500,000 + ₹50,000 + ₹100,000 = ₹650,000

3. Apply the ROI Formula

ROI = (₹96,000 ÷ ₹650,000) × 100 = 14.77%

📌 This means you’re earning a 14.77% return annually on the money you invested.

🏘 ROI for a Fix-and-Flip Property

For flips, ROI focuses on resale profit:

ROI = (Profit ÷ Total Investment) × 100

Where:

Profit = Selling Price – (Purchase Price + All Costs)

Example:

Item	Amount
Purchase Price	₹3,000,000
Rehab Costs	₹400,000
Closing & Selling Costs	₹200,000
Selling Price	₹4,000,000

→ Profit = ₹4,000,000 – (₹3,000,000 + ₹400,000 + ₹200,000) = ₹400,000
→ Total Investment = ₹3,600,000
→ ROI = (₹400,000 ÷ ₹3,600,000) × 100 = 11.11%

📉 Don’t Forget These Adjustments

To get a more accurate ROI, consider:

Vacancy losses (budget 5–8% of rent)
Maintenance reserves
Appreciation or depreciation over time
Tax impacts (rental income, capital gains)

🧠 ROI vs. Other Metrics

ROI is useful—but not the only number you should look at. Pair it with:

Metric	Tells You
Cash-on-Cash Return	How much return you earn on just your cash investment
Cap Rate	Property’s income potential, ignoring financing
IRR (Internal Rate of Return)	Total return over time (good for long-term deals)

Final Thoughts

ROI gives you a quick snapshot of whether a property is worth your time and money. The higher the ROI, the better—but always compare it with your personal financial goals, the market, and the risk level.