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Hi Friend,

I hope you are doing well.

If you are new to real estate investing, chances are you do not know how to calculate ROI (Return on Investment).

For many new investors, the topic of ROI is a confusing one and many people do not understand it.

If you are serious about buying your first rental property. and you think that you are going to purchase multiple rental properties, at some point, you need to understand ROI and become comfortable with calculating it.

So what are the reasons you need to know how to calculate ROI ?

Reason #1 Is the investment good or bad?

One of the major reasons you need to know how to calculate ROI is to know weather an investment is good or bad.  If you do not know how to calculate ROI, you will not be able to differentiate when you see a good investment, or when you see a sub par investment.

Reason #2 Protect Yourself

Another major reason as to why you need to know how to calculate ROI is so that you can protect yourself.  You can protect yourself in that, if an investment is presented to you, and the ROI is stated, you will be able to double check the numbers and determine if the ROI is in fact the same as what is being presented.

At the end of the day, ROI is not hard to calculate.  It is comprised of 3 components.

Component #1 — The money you are investing.

When calculating ROI, you need to first take a look at the money you are investing.

If we are look at an example, lets say that you are investing $100,000.

Now that you know how much money you are investing, you now need to look at component number 2.

Component #2 How much money you are making .

With real estate investing, the money you make can come in different forms. It can come in the form of cash flow, mortgage paydown or appreciation.  In this example we are going to keep things simple.

Lets say that they money that you made on your $100,000 investment was $14,000.

Now that you know how much money you invested, and how much money you made you need to look at component number 3.

Component # 3 Time Period

When calculating ROI, you always want to take a look at the time frame.

For example, using the numbers above, lets say that they money you made ($14,000) on your initial investment of ($100,000) was done in one year.

Therefore, when you are calculating your ROI, it would look like this

$14,000 (money you made) / $100,000 (initial investment) = 14% in year one

As you can see from above, if you invested $100,000 into rental property and made $14,000 (with cash flow, mortgage paydown and/or appreciation) in the first year, your ROI when calculated would be 14%.

This is a simple explanation of how to calculate ROI.  Simple is good because most novice real estate investors do not know how to calculate ROI.  You need to have a basic understanding of it, and the explanation above gives you just that!

So what do you think?  Is calculating ROI is harder or easier than you thought?  Leave your comments below.

Happy Investing!

Regards,

Neil Uttamsingh

ps: If you are serious about buying your first rental property, sign up for the First Rental Property Newsletter.  All you need to do is fill out the form located at the top right hand corner of the blog.  When you do this, you will start to receive tips and tricks from experienced real estate investors on how to buy your first rental property!