How do investors typically calculate return on investment (ROI) for real estate?

Investors typically calculate return on investment (ROI) for real estate using the formula that involves net profit relative to the total investment. This method provides a clear picture of how much profit is generated for each dollar invested, allowing investors to assess the effectiveness of their investment.

When using the formula (net profit / total investment) x 100, net profit is derived from the income generated by the investment after all expenses related to that investment have been subtracted. Total investment refers to the amount of capital invested in the property, which may include the purchase price, renovation costs, and other associated expenses. By calculating ROI in this manner, investors gain a percentage that reflects the efficiency of their investment, which is fundamental for comparing different investment opportunities or assessing the performance of their real estate portfolio over time.

This approach emphasizes the relationship between profitability and investment, making it a standard practice among real estate investors.