# EP039: A Simple Way to Understand ROI

ROI, or return on investment, is the single most important metric to consider when purchasing rental real estate. If you’ve ever wondered how to calculate ROI, or have been intimidated by the concept, today’s show is for you!

On this episode, I’m sharing the most simple and straightforward way to calculate ROI. I’ll give specific examples and formulas to help you evaluate the performance of your investments. If you’re serious about making the most out of your investments, don’t miss this episode of Investing in Real Estate!

ROI is a measure used to estimate and evaluate the performance of an investment. It’s a simple way to understand how much profit a property is accumulating. Generally speaking, ROI is calculated by dividing the net profit of an investment by the amount of money invested.

However, there are a couple different ways to calculate ROI. One method is complicated, and the other is simple. I find that using a simple, conservative formula not only allows me to quickly analyze the return on a property, but it also allows me to be prepared for any potential expenses.

When I calculate ROI, I always subtract 40% of my annual rental income to account for any potential vacancies, repairs, or expenses that could occur throughout the year. By calculating ROI in this manner, I don’t have to worry if something goes wrong at my properties. Additionally, I am always pleasantly surprised at the end of the year when my investments are more profitable than I had originally projected.

Specifically, to estimate the return on investment, I multiply the monthly rent by twelve in order to determine the annual rent. Next, I multiply the annual rent by .6 to account for vacancies, repairs, and expenses. That figure is then divided by the total cost of the house to estimate ROI.

I always aim to earn a minimum of 10-12% ROI on my properties. With any buy and hold property, ROI is the most important figure. If the return on investment is profitable on a potential deal, I will purchase the property, remodel it, find a tenant, and keep the investment forever.

On today’s show, I’ll elaborate on the more complicated way to estimate ROI. I’ll talk about the difference between a cash transaction and a financed transaction, and give specific examples for each. I’ll also talk about the aspects that are irrelevant when it comes to purchasing rental real estate, and go in depth into why ROI is essential.

If you're ready to take the first actionable step toward building a passive income,

On this episode you’ll learn:

• What are the two unavoidable expenses in rental real estate?
• What are the two ways ROI is expressed?
• Under what circumstances are closing costs higher?
• What is the benefit of using a conservative formula to calculate ROI?