What is Investment Return?
Investment return is the percentage profit an investor realizes from an investment. This metric primarily accounts for the net proceeds after selling a property. However, it can also encompass the regular income received from leasing the property.
When calculating an investment return, several factors must be considered, including the purchase price, carrying costs for mortgage payments, insurance, taxes, and any additional money invested in property improvements.
Real-life Example
Let’s say an investor purchases a property for $100,000 and invests an additional $25,000 in improvements. During the improvement period, carrying costs mount up to $5,000. Therefore, the total investment in the property sums up to $130,000.
The property is eventually sold for $150,000. To calculate the investment return:
- Subtract the total investment ($130,000) from the sale price ($150,000) to get a profit of $20,000.
- Divide the profit ($20,000) by the total investment ($130,000).
This calculation reveals an investment return of 15.3 percent.
Why It Matters:
Understanding and calculating your investment return helps you ascertain the profitability of your investments. Armed with this knowledge, you can make informed decisions to optimize your investment strategies and enhance your financial growth.
Related Terms: ROI, investment analysis, property investment, real estate finance.
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### How is the Investment Return defined?
- [ ] The total cost of buying and maintaining a property
- [ ] The original purchase price of a property
- [x] The percentage an investor receives on an investment
- [ ] The annual property tax payment
> **Explanation:** Investment Return is the percentage an investor receives on an investment. It can refer to net proceeds after the sale of a property or regular income received from leasing out the property after accounting for purchase, carrying costs, and improvement investments.
### What is included in the carrying costs for calculating Investment Return?
- [ ] Only taxes
- [ ] Only mortgage payments
- [ ] Only insurance
- [x] Mortgage payment, insurance, and taxes
> **Explanation:** The carrying costs include mortgage payment, insurance, and taxes. These are all regular expenses that contribute to the overall investment amount when calculating the Investment Return.
### How do you calculate the Investment Return if the sale amount is $150,000 and the total investment is $130,000?
- [ ] ($150,000 - $130,000) / $160,000
- [x] ($150,000 - $130,000) / $130,000
- [ ] ($130,000 - $150,000) / $130,000
- [ ] ($150,000 + $130,000) / $130,000
> **Explanation:** To calculate the Investment Return, you subtract the total investment amount from the sale amount to get the profit, which in this case is $20,000. Then, you divide the profit by the total investment amount, $130,000, resulting in an Investment Return of approximately 15.3 percent.
### What is the profit amount if a property is sold for $150,000 and the total investment made was $130,000?
- [ ] $150,000
- [x] $20,000
- [ ] $130,000
- [ ] $25,000
> **Explanation:** The profit is calculated by subtracting the total investment from the sale amount. So, $150,000 - $130,000 equals a profit of $20,000.
### What does an Investment Return of 15.3 percent signify?
- [ ] The investor lost 15.3 percent of their investment
- [ ] The investor paid 15.3 percent in taxes
- [ ] The property's carrying cost is 15.3 percent
- [x] The investor gained 15.3 percent of their investment amount in profit
> **Explanation:** An Investment Return of 15.3 percent signifies that the investor's profit is 15.3 percent of the total amount they invested. This indicates a gain relative to their invested capital.
