While there are many reasons one may seek to make investments, not least among them will be the ROI or Return on Investment. This is the term that describes, in its most simple form, the net profit made on an investment. In other words, the ROI is the amount of return generated relative to an investment’s cost. It is usually expressed as a percentage, is calculated by determining the gain from the investment, less the price, and divided by the overall cost.
How Can I Calculate my Return On Investment?
For example, if your original investment was $2,000 and your total gain from the investment is $3,000 then your ROI for that investment is 50%, calculated by dividing the $1,000 net profit by the $2,000 original investment.
ROI can be an important factor when determining what investments to make. If you are considering investing in multiple options, knowing the projected ROI is useful for determining which project to invest in. For example, if the expected ROI for one development is 50% and for another one it’s 60%, you will likely be most interested in choosing the development with the higher ROI.
The Return On Investment Also has its Limitations
However, there can be some limitations to ROI, particularly when you’re dealing with forecasts and not actual results. ROI calculations only show you the potential return, but they do not identify the risks. Basically, ROI calculations tell you what you have to gain, but they are unable to tell you what you might have to lose.
Generally speaking, it is often the case that the higher the potential ROI, the greater the risks. This is clear when considering stocks and bonds. Usually, stocks have a higher return on investment than bonds, but bonds are a much safer investment.
Additionally, ROI calculations also do not consider the length of time required to gain the return, nor does it consider other non-monetary benefits. For example, when considering companies to invest in, you may note that a specific company project is not expected to have significant profit returns, but it may increase visibility or brand recognition and therefore improve ROI on future projects.
Consider the ROI Before Investing in Real Estate
When it comes to investing in real estate, ROI is definitely an important factor to consider. It also has the potential to be a much more complicated calculation than the basic form noted above for several reasons.
Homes that are financed rather than purchased with cash will have to consider not only interest costs but also such items as higher closing costs, fees, utilities, maintenance, and other up-keep costs, as well as overall home equity. For properties that will be used for rental income, that return will also need to be factored into the overall calculation.
Finally, when dealing with ROI in real estate, it is important to remember that ROI does not always equal profit. In order to fully realize the ROI of a real estate purchase, the home, of course, has to be sold for the profits to be realized.
Whether you intend to gain ROI through the purchase of property or realize it through its sale, our team at Top Mexico Master Broker is here to help!