How to Calculate Return on Investment in Real Estate

by C. Taylor

Real estate is a wonderful investment opportunity, because you receive regular rental income on top of any appreciation of the property. This rental income constitutes your return on investment for properties you hold indefinitely, so you may wish to calculate its return on investment to compare it to other investment opportunities. The great thing about real estate is it's leveraged against borrowed money in the form of a mortgage. Although, you may have a preconceived notion that debt is bad, the leverage a mortgage offers can increase your return on the investment.

Add your monthly expenses for the rental property, such as a mortgage, advertising, average maintenance costs, regime fees or utilities you pay. As an example, you might only have a $500 monthly mortgage and $50 per month miscellaneous expenses, so your monthly expenses are $550.

Subtract this amount from the rental income you receive to calculate your net monthly profit. As an example, if you received $800 rent, you would have a net monthly profit of $250.

Multiply this net profit by 12 to calculate your annual profit. In the example, you net annual profit is $3,000. This calculation assumes you consistently rent the property. If you have periods of vacancy, you can total everything throughout the year, month by month, to more accurately calculate your annual profit.

Divide this figure by your initial investment. In the example, if you placed a $10,000 down payment for the mortgage, you would divide $3,000 by $10,000 to derive a return on investment of 0.30, or 30 percent. In comparison, imagine you bought the property outright for $100,000, so you could avoid the mortgage debt. Your net monthly profit would increase to $9,000, but your return on investment would decrease to a meager 9 percent. By calculating your return on investment, you can quantify the benefit from the mortgage's leverage.

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