There are a few different ways to calculate the return on investment (ROI) for real estate, but the most common method is to use the capitalization rate, or cap rate. This is calculated by dividing the net operating income (NOI) of a property by the property’s current market value.
For example, let’s say you purchased a rental property for $200,000 and it generates $20,000 in net operating income per year. The cap rate for this property would be 10% (20,000 / 200,000).
Another way to calculate ROI is to use the total return approach, which takes into account not only the income generated by the property, but also any changes in the value of the property over time. To calculate total return, you would add the annual net income from the property (including any appreciation or depreciation in value) to the initial investment, and then divide that number by the initial investment.
For example, if you purchased the same $200,000 property and it generated $20,000 in net income per year, but also appreciated in value by 5% per year, your total return would be 15% (20,000 + (200,000 x 0.05)) / 200,000).
It’s important to note that these are just a couple of examples of how to calculate ROI for real estate, and there are many other factors that can affect the return you can expect to receive from a property. These can include the location of the property, the local real estate market, the condition of the property, and the level of demand for rental properties in the area.