How to calculate return on investment on property investment
Understanding ROI(return on investment)
A “return on investment” calculates how much income is gained from an investment, considering the cost of making that investment. This measure can be used to assess the efficiency and efficacy of an investment overall, or in relation to other investments.
ROI = (Gain from Investment – Cost of Investment) ÷ Cost of Investment
For the sake of easy math, let’s say you acquire a property for $100,000. Years later, you sell the property for $150,000. Using our formula from above, we get:
(1,50,000 Rs – 1,00,000 Rs) ÷ 1,00,000 Rs = 0.5, or 50%. So in this scenario, the rate of return on your investment is 50%.
Calculating ROI of Investment Properties
Unfortunately it is not typically that simple to calculate the ROI of a rental property. Many other considerations have to be taken into account. Did you buy the property in cash for example, or have you taken out a mortgage?
If you have purchased the house, you will have to take into account both the down payment and the mortgage payments. You should also be factoring in factors such as repair and maintenance costs, as well as ongoing operating expenses, to find an accurate ROI. Similarly, any revenue (such as rental property) should also be factored into your ROI.
Step 1: Start with a Baseline
In order to determine the Return on Investment from a new project, a benchmark must first be set to consider precedent. In this context, there are only three reference examples.
The enterprise is only beginning in Scenario 1, so there is no precedent. In there is a blank canvas.
In Scenario 2, the latest plan is aimed at enhancing only one aspect of the return-investment activities. In this case the baseline is the return in this region from the previous process.
The Investment needs a transformation or restructuring in scenario 3 which is likely to impact several areas.
Step 2: Determine whether Revenue or Income is a return on investment
From the outset, be explicit on how you calculate the return on investment for an instrument. Is it profit or revenue from the ROI? For some instances the most desirable factor is this differentiation. But this segregation sometimes becomes more difficult to understand and to control.
Step 3: Determine the Time Frame
You must know how long it will take before you can set the Return on Investment. The timeframe for ROI is, in most cases, about 1-2 years.
Step 4: Decide the Inputs for the Returns
Return on Investment is a prediction or calculation of what is going to happen by the time period ending. Using real figures, not metrics or percentages, if you want to produce normative results. Trust in the data ensures the return on investment for the given instrument is correct.
Step 5: Identify the Investments
That in some situations is self-evident. Nevertheless not always. Let 's say there's an important infrastructure project going on that will take a few years, but the Return on Investment period is one year.
A Return on Investment investment focuses on the cash balance and the spending in that year. Hence, you should choose the Investment with a substantial ROI after a thorough online and offline research.
Step 6: Calculate the ROI of Investment with Returns
The Calculation of Return on Investment is simple (as seen above). To ease the Return on Investment calculation process, an online ROI calculator can be used to estimate whether the investment opportunity would provide the desired Return on Investment.
See Also: How to decide right location for property investment