Return on Investment (ROI) is a performance metric used to evaluate the financial efficiency of an investment, or to compare the relative efficiency of multiple investments. It measures an investmentâ€™s gain or loss relative to the initial investment. ROI is calculated as follows:
ROI = (earnings â€“ cost of investment) / cost of investment * 100%
ROI typically appears as a percentage; for example, investment XYZ has a ROI of 10%. The ROI calculation is the same for every type of investment â€“ whether itâ€™s stocks, real estate, or collectibles. The calculation can be manipulated, however, in terms of how costs and returns are accounted for. For example, real estate investors can use either the cost method or the outofpocket method to determine ROI.
Assume a real estate investor buys a house for $150,000, puts $50,000 into it for repairs and renovations, and then sells the property for $250,000. The investorâ€™s equity position in the property is $250,000 â€“ ($150,000 + $50,000) = $50,000. If the investor uses the cost method, the ROI will be calculated by dividing the equity by all costs:
$50,000 / $200,000 *100% = 25% ROI
If the investor instead uses the outofpocket method, the ROI will be calculated taking into consideration the down payment amount instead of the purchase price. A 20% down payment on the $150,000 property would be equal to $30,000, and total costs would be limited to this down payment plus the $50,000 for repairs and renovations, or $80,000 total. With the value of the property at $250,000, the investorâ€™s equity position in the property would be $250,000 â€“ ($30,000 + $50,000) = $170,000. The ROI again is calculated by dividing the equity by all costs:
$170,000 / $80,000 *100% = 212% ROI
As the example shows, the ROI for similar investments can vary greatly, depending on how the value is calculated. In these examples, the outofpocket method allows the investor to use leverage (by financing the property) to increase the ROI. It would be important, however, to take into consideration the costs associated with the loan, as they will affect the bottom line. Itâ€™s also important to stick to one method if more than one investment is being evaluated; otherwise, the results will be misleading.

Why is return on investment (ROI) a bad measure for calculating longterm investments?
Return on investment (ROI) is a useful valuation tool, but it lacks meaning for longterm investments. Read Answer >> 
How do you calculate return on investment (ROI)?
Find out how to calculate return on investment, or ROI, for your portfolio, and learn why it is considered so valuable in ... Read Answer >> 
What is the difference between ROCE and ROI?
Understand the difference between return on capital employed and return on investment and how analysts use these performance ... Read Answer >> 
What is the formula for calculating return on investment (ROI) in Excel?
Find out more about return on investment (ROI) and the formula used for calculating return on investment for a company in ... Read Answer >> 
What is the importance of the capitalization rate in real estate investing?
Find out why an investment property's capitalization rate is important to real estate investors and how it can be used to ... Read Answer >> 
How do you use DCF for real estate valuation?
Learn how discounted cash flow analysis is used for real estate valuation and the various factors that go into calculating ... Read Answer >>

Investing Basics
How to Calculate ROI For Real Estate Investments
When it comes to real estate investments, there are two important ROI calculations to know. 
Active Trading
FYI On ROI: A Guide To Calculating Return On Investment
Return on investment is a simple equation that can give you an edge when finetuning your portfolio  here's how to use it. 
Investing
Figuring What You Make On Rental Property (ROI)
The return on investment can vary greatly, depending on how much of the building you own. 
Home & Auto
How To Calculate ROI For Real Estate Investments
Calculating return on real estate investments can be difficult. We help you figure it out. 
Personal Finance
How To Calculate ROI Of A Marketing Campaign
To make the most of your marketing spend, you need to know how to measure its results. 
Savings
College Tuition vs. Investing: Is It Worth It?
With the rising cost of college and questionable career prospects awaiting college graduates, some are wondering if a college education is still worth it. 
Professionals
8 College Degrees with the Best Returns on Investment
Find out which college degrees offer the best opportunities to earn a salary that can generate a solid return on your investment in education. 
Investing Basics
3 Ways To Evaluate the Performance of Alternatives
Learn about three ways to measure the performance of alternative investments. See how the commonly used Sharpe ratio has drawbacks in measuring volatility. 
Fundamental Analysis
Return on Investment (ROI) Vs. Internal Rate of Return (IRR)
Read about the similarities and differences between an investment's internal rate of return (IRR) and its return on investment (ROI). 
Fundamental Analysis
5 Stock Market Metrics Explained
Learn how to evaluate a company's performance using metrics such as ROE, EPS and P/E ratio.

Return
The gain or loss of a security in a particular period. The return ... 
Investment Center
A business unit that can utilize capital to directly contribute ... 
CashOnCash Return
A rate of return often used in real estate transactions. The ... 
Capitalization Rate
The rate of return on a real estate investment property based ... 
Average Cost Basis Method
A system of calculating the cost basis on mutual fund positions ... 
Market Approach
A method of determining the appraisal value of an asset based ...