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ROI (Return on Investment)
The total return earned on an investment expressed as a percentage of the amount invested.
Definition
Return on Investment measures the total gain or loss on an investment relative to the amount of capital deployed. In real estate, ROI can be calculated multiple ways: simple annual cash-on-cash return, total return including appreciation and equity buildup, or annualized return over the hold period. A comprehensive ROI calculation includes cash flow, principal paydown, appreciation, and tax benefits. ROI is easy to understand but can be misleading if it doesn't account for the time value of money — which is why many sophisticated investors prefer IRR for comparing opportunities.
Related Terms
Cash-on-Cash Return
The annual pre-tax cash flow divided by the total cash invested, measuring the return on actual dollars deployed.
IRR (Internal Rate of Return)
The annualized return that accounts for the timing and magnitude of all cash flows over the investment period.
Equity
The difference between a property's market value and the outstanding mortgage balance.
Appreciation
The increase in a property's value over time due to market conditions, improvements, or both.
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