ROI stands for “return on investment” and it’s a very important concept to understand when it comes to real estate investing.
It is a standard metric used to calculate the profitability of an investment on a case- by-case basis. It measures the financial return of a particular investment relative to its cost. The higher the ROI, the more profitable the investment and (presumably) the better it is.
Why is ROI so popular for measuring profitability?
Two reasons: first, it’s incredibly simple to understand and easy to calculate the ROI on almost any investment.
Second, it provides a simple way to get a financial “snapshot” of an investment relative to other investments so you know when to buy, sell, or simply measure whether your portfolio is on the right track.
Although it’s incredibly important to know the ROI of any investment, it rarely takes into account the complexities, nuances, and “life factors” involved in growing a successful real estate portfolio. For this reason, it should be used as a tool to give broad feedback on the quality of your investments.
Why is ROI in real estate so important?
Although many ROI formulas paint a simplistic picture of investing, they can also give a very quick and solid overview of a property’s profitability.
In a pinch, you can figure out the “health score” of any potential investment you’re interested in and weed out some of the bad apples along the way. Properties with an obvious cash flow issue or negative ROI can be identified quickly.
When taken into account with your overall investment goals, using ROI calculations will help you make smart financial decisions and build a solid real estate portfolio.
Here at BuyProperly, we calculate ROI for our investors and use it as a benchmark to measure the profitability of our properties. Most of our investors can expect to see projected annual returns of 10-40%!