PARTNERING WITH INVESTORS TO ACHIEVE MAXIMUM ROI

One of the main reasons people invest is to increase their wealth. Although the motivations may differ between investors—some may want money for retirement, others may choose to sock away money for other life events like having a baby or for a wedding—making money is usually the basis of all investments. And it doesn't matter where you put your money, whether it goes into the stock market, the bond market, or real estate.

Real estate is tangible property that's made up of land, and generally includes any structures or resources found on that land. Investment properties are one example of a real estate investment. People usually purchase investment properties with the intent of making money through rental income. Some people buy investment properties with the intent of selling them after a short time.1

Regardless of the intention, for investors who diversify their investment portfolio with real estate, it's important to measure return on investment (ROI) to determine a property's profitability. Here's a quick look at ROI, how to calculate it for your rental property, and why it's important that you know a property's ROI before you make a real estate purchase.

KEY TAKEAWAYS

• Return on investment (ROI) measures how much money, or profit, is made on an investment as a percentage of the cost of that investment.

• To calculate the percentage ROI for a cash purchase, take the net profit or net gain on the investment and divide it by the original cost.

• If you have a mortgage, you'll need to factor in your downpayment and mortgage payment.

• Other variables can affect your ROI including repair and maintenance costs, as well as your regular expenses.

The Formula for ROI

To calculate the profit or gain on any investment, first take the total return on the investment and subtract the original cost of the investment.

To calculate the percentage ROI, we take the net profit, or net gain, on the investment and divide it by the original cost:

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For instance, if you buy XYZ stock for $1,000 and sell it two years later for $1,600, the net profit is $600 ($1,600 – $1,000). ROI on the stock is 60% [$600 (net profit) ÷ $1,000 (cost) = 0.60].