Master Measuring Your Investment Performance: Calculate Return on Investment (ROI)
Evaluating the success of your investments can seem daunting, but there’s a straightforward tool that can offer clarity—Return on Investment (ROI). To break it down, ROI, which is expressed as a percentage, provides a measured value reflecting the efficiency and profitability of your investment.
Understanding ROI§
Simple yet effective, ROI is calculated by dividing the net profit of your investment by the cost of the investment, and then multiplying by 100 to get the percentage form. Here’s the formula:
$$\text{ROI} = \left( \frac{\text{Net Profit}}{\text{Cost of Investment}} \right) \times 100$$
Real Estate Investment Example§
Let’s delve into an example considering a real estate investment.
Imagine you purchased a home for $200,000 and sold it for $250,000 after a few years. Over its tenure, the property also generated a total rental income of $40,000. Below are the factors to consider in this calculation:
Scenario Details§
- Purchase Price: $200,000
- Selling Price: $250,000
- Rental Income: $40,000
- Total Income: $50,000 Capital Gain + $40,000 Rental Income = $90,000
Consider Additional Expenses:§
- Repairs & Maintenance: $10,000
- Property Taxes: $5,000
- Homeowner’s Fees: $3,000
- Total Expenses: $18,000
Calculate Net Profit§
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Related Terms: Net Present Value (NPV), Internal Rate of Return (IRR), Gross Profit Margin, Operating Margin, Cost of Investment.
