What Is Return on Investment?
ROI (return on investment) measures the total gain from an investment relative to its cost, expressed as a percentage. In real estate it can include cash flow, loan paydown, appreciation and sale proceeds, so check what a quoted ROI counts and what it divides by before comparing figures.
Return on Investment in plain English
Return on investment compares what you gained with what you put in. In real estate the gain can include rental cash flow, the loan balance you paid down, appreciation and, at the end, the sale proceeds.
Because people include different things, two ROI figures are only comparable when you know exactly what each counts and what it divides by.
Formula
ROI = (Gain from Investment − Cost of Investment) ÷ Cost of Investment × 100- Gain from Investment
- Everything you count as return - for example cash flow, loan paydown and appreciation, or the sale proceeds.
- Cost of Investment
- What you divide by - usually the cash you invested, sometimes the total cost.
ROI ignores timing; an IRR accounts for when each dollar arrives.
Worked example
ROI and cash-on-cash return on one rental, first year
Illustrative example - round numbers, not current market data. Calculated with Reaixo's calculator engines.
Assumptions
- Price and down payment
- $300,000 with 25% down ($75,000)
- Closing costs
- $9,000
- Loan
- $225,000 at 7.00%, 30 years
- Net operating income
- $24,000 a year
- Assumed appreciation (hypothetical)
- 3% in year one
| Step | Calculation | Result |
|---|---|---|
| 1. Cash invested | $75,000 + $9,000 | $84,000 |
| 2. Cash flow | $24,000 − $17,963 debt service | $6,037 |
| 3. Cash-on-cash return | $6,037 ÷ $84,000 × 100 | 7.19% |
| 4. Principal paid down in year one | $225,000 − balance after 12 payments | $2,286 |
| 5. Total return (cash flow + paydown + appreciation) | $6,037 + $2,286 + $9,000 | $17,322 |
| 6. ROI on cash invested | $17,322 ÷ $84,000 × 100 | 20.62% |
Cash-on-cash vs ROI: 7.19% vs 20.62%. Only $6,037 arrives as spendable cash, a 7.19% cash-on-cash return. Counting the loan paydown and the assumed appreciation, the year's ROI is 20.62% - but most of that is paper gain you cannot spend until you sell or refinance, and the appreciation may not happen.
What this calculation leaves out
- Appreciation is a hypothetical input, not a forecast; at 0% the ROI falls to the cash flow plus paydown.
- ROI here ignores selling costs and taxes, which reduce the gain you could actually realise.
- Some people define ROI on the full price rather than cash invested; always state the denominator.
Try it: Return on Investment with your own numbers
Interactive and illustrative: change any value and the results update instantly in your browser. The figures come from the same engines as REAIXO's full calculators.
Remodel ROI: cost against value added
Few projects add as much value as they cost. The bars compare what each project costs with the resale value it typically adds.
- Kitchen Remodel
- 75%
- $33,750 back on $45,000
- Bathroom Remodel
- 70%
- $17,500 back on $25,000
- Paint
- 95%
- $5,700 back on $6,000
- Roof
- 60%
- $10,800 back on $18,000
- Project cost
- Typical value added
Show the numbers as a table
| Project | Cost | Value added | ROI | Net cost |
|---|---|---|---|---|
| Kitchen Remodel | $45,000 | $33,750 | 75% | $11,250 |
| Bathroom Remodel | $25,000 | $17,500 | 70% | $7,500 |
| Paint | $6,000 | $5,700 | 95% | $300 |
| Roof | $18,000 | $10,800 | 60% | $7,200 |
Formula
ROI = Value added ÷ Project cost × 100Net cost = Project cost − Value addedAssumptions
- Value added is a typical resale recovery, not an appraisal.
- Spending far above what similar homes nearby offer (over-improving) recovers less.
Why it matters
A high ROI driven mostly by assumed appreciation is not cash you can spend. Check the deal still works with appreciation set to zero.
What it means for you
What investors should know
Report ROI with its components so others can see how much is cash and how much is paper gain.
Common mistakes
- Comparing ROI figures that use different denominators.
- Counting projected appreciation as certain.
- Ignoring selling costs and taxes when calculating gain.
Compare and common questions
Return on Investment: frequently asked questions
How do you calculate ROI on a rental property?
Add up the gains you want to count - cash flow, principal paydown and appreciation - and divide by the cash you invested. State which items you included.
What is a good ROI on real estate?
It depends on risk, leverage and your alternatives. Compare ROI only with figures calculated the same way over the same period.
How is ROI different from cash-on-cash return?
Cash-on-cash counts only the cash the property pays you; ROI can add loan paydown and appreciation.
Related Terms
More Investing Terms
Recommended next step
See why the two measures differ on the same property.
ROI vs cash-on-cash return →Sources and review
No regulator defines this term; the page follows common industry practice.
Where this applies: Not regulated. Investment ratios and budgeting conventions are industry practice; lenders and analysts may define inputs differently.
Last reviewed: · Updated:
Examples use illustrative figures; rules of thumb are labelled as such. Rates, limits and program rules change - confirm current figures with your lender or a qualified professional.
This definition is provided for general educational purposes and is not financial, legal, tax, or real estate advice. Verify important decisions with appropriately qualified professionals.
Apply these investment calculations to a real property
Run the numbers with the free calculator, or get a property-specific analysis built on the same calculations.
- Free calculatorROI Calculator →Runs in your browser; nothing to sign up for.
- Paid reportFive-Year Investment Projection →Project the long-term value and return of any investment property. Price shown before checkout.
Or analyze a specific property: Essential Property Analysis, $19 · Property Decision Analysis, $49 · Professional Property Analysis, $99. You choose the depth before you pay.