Understanding Return on Investment

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Do You Know ROI?

Understanding Return on Investment is one of the most important areas of operating a business or running a project. Many shorten Return-on-Investment to ROI. Keep this in mind when speaking with business lenders and investors. 

Return on investment is a performance measure. The purpose of this measure is to evaluate the profitability of an investment. The aim is to measure the amount of return on a particular investment, compared with the investment’s cost. A simple formula is return of an investment is divided by the cost of the investment. 

Real Estate Return on Investment

Real estate investors use ROI (Return on Investment) all the time. The ultimate objective of a real estate purchase is to generate profits (returns). Real estate investors put time and effort into purchasing a property that has potential.

Have a Business Plan

When the cost of broker fees, financing and rehabilitation is calculated, there must be a reward for the all the hard work. This is where ROI comes in.

"I purchased a large single family home in Connecticut for $950,000, invested $235,255 into improvements and sold the property for $1,595,000.
Jack P

Small Business Return on Investment

Small business owners can calculate ROI by dividing the amount you earned (Net Profit) from their investment. This will most likely be over a multi-year cycle. 

Sales less COGS less Fixed Expense.

Consider depreciation, amortization and taxes that must be paid on any Net Return. These areas are important to understand.

Here are a few examples on how to calculate ROI: 

ROI = (Net Profit / Cost of Investment) x 100

ROI = (Present Value – Cost of Investment / Cost of Investment) x 100

An example is if you invested $50,000 ABC LLC in 2022, and sold your percentage in 2023 for $55,000, you would calculate ROI as follows: 

ROI = ($55,000 – $50,000 / $50,000) x 100

ROI = 10%

It is prudent to pursue ROI of 8% or more on investments. 

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