For property investors, knowledge is power. One effective tool that Property investors need to know is how to calculate the Return on Investment, or ROI they are achieving.
In simple terms, ROI is the ratio of profit or loss made, expressed as a percentage.
The basic formula for ROI is: Net Profit / Total Investment X 100
It is most commonly used to analyse return on a particular property for a particular financial year however can be applied in a variety of ways to allow greater insight into the performance of investment.
It is a simple but highly effective calculation that can be made prior to purchasing a property to determine the viability of profits and stability of returns or compare a number of properties being considered.
Astute investors conduct reviews ‘at regular intervals’ to analyse their investments and hopefully maximize profits, whether that be based on an individual property or across their entire portfolio.
An effective tool to assist decision making, the ROI formula can be used when considering improvements, renovations or the purchase of new fixtures or fittings to determine viability and complement depreciation/taxation benefits.
For example: If you invest $15,000 on improvements to the property that results in a $50 rent increase per week the ROI on would be 17.3%.
ie: $50 rent increase x 52 weeks = $2,600 / $15,000 X 100.
The average rate of ROI is often considered 10%-15% however depending on an investors strategy, they might be thrilled with 1-2% ROI based on rental yield if the property is in an area that is experiencing substantial growth.