What Is ROI (Return on Investment) in Real Estate?

ROI (Return on Investment) measures how much profit you earn on a real estate investment compared to how much you spent acquiring it. Investors use ROI to evaluate performance, compare deals, and determine whether a property is generating a strong return.

How ROI Works in Real Estate

ROI calculates the percentage gain or loss on an investment. In real estate, ROI typically includes:

  • Net cash flow from rent
  • Operating expenses
  • Mortgage payments (optional depending on method)
  • Appreciation or sale profit
  • Total cash invested upfront

Basic ROI Formula:

ROI = (Total Profit ÷ Total Investment) × 100

This shows how efficiently your investment is producing returns.

Example of ROI in Real Estate

Suppose you invest $50,000 in a rental property for the down payment, closing costs, and repairs. After one year, the property generates $6,000 in net cash flow.

ROI = $6,000 ÷ $50,000 = 12%

This means you earned a 12% return on your cash investment for the year.

ROI vs. Cash-on-Cash Return vs. IRR

  • ROI – Measures overall profitability compared to total investment
  • Cash-on-Cash Return – Focuses only on annual cash flow relative to cash invested
  • IRR – Calculates long-term return using multi-year cash flow and sale proceeds

ROI is simple and widely used, while cash-on-cash helps evaluate yearly performance and IRR provides a full investment projection.

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