2025 Real Estate ROI Guide: Calculate Your Investment Returns & Costs

Understanding your profit from real estate investments starts with knowing how to calculate your Return on Investment (ROI). Here, we break down two effective methods to help you evaluate your gains.

The cost method and out-of-pocket method are essential tools for measuring ROI, which represents the percentage of profit relative to your total investment costs.

Key Insights

• ROI quantifies the profit earned—or potential profit—on an investment property.
• It compares your total investment, including purchase price and renovation expenses, to the current market value.
• The cost method and out-of-pocket method are the two main approaches to calculate ROI in real estate.

Two Effective Ways to Calculate Real Estate ROI in 2024

Choose between the cost method and out-of-pocket method to calculate ROI. Below are straightforward examples that do not factor in rental income or ongoing expenses like property taxes.

The Cost Method Explained

This method divides your investment gain by the total costs invested in the property.

For example, if you purchase a property for $100,000 in cash and spend an additional $50,000 on renovations, and the property's current value is $200,000, your gain is $50,000 (market value increase minus renovation costs).

Calculate ROI by dividing the gain by total costs:

$50,000 ÷ $150,000 = 0.33, or 33% ROI.

The Out-of-Pocket Method Explained

Preferred by many investors, this method considers your actual cash spent (down payment plus repairs) and compares it to the property's current equity.

Using the prior example, if you financed the property with a $20,000 down payment and spent $50,000 on repairs, your out-of-pocket expense is $70,000. With a current property value of $200,000, your equity is $130,000.

ROI calculation:

$130,000 ÷ $200,000 = 0.65, or 65% ROI.

This method shows how leveraging a loan can nearly double your ROI.

What Constitutes a Good ROI for Real Estate Investors in 2024?

ROI expectations vary based on individual risk tolerance. Risk-takers may seek higher returns, while conservative investors accept lower but steadier gains.

Many investors target returns comparable to or exceeding the S&P 500’s historical average annual return of around 10%.

Investing in real estate doesn’t always mean buying property. Real Estate Investment Trusts (REITs), traded like stocks, offer diversification and liquidity. As of March 31, 2024, equity REITs have delivered 3.45% and 6.59% compound annual returns over five and ten years, respectively.

Important Notice

Mortgage lending discrimination is illegal. If you experience discrimination based on race, religion, sex, or other protected categories, consider filing a complaint with the Consumer Financial Protection Bureau or the U.S. Department of Housing and Urban Development.

Costs That Can Impact Your Real Estate ROI

Actual profits depend on the sale price of your property, which may differ from market value, potentially lowering your ROI.

Additional expenses include repairs, painting, landscaping, advertising, appraisals, agent commissions, and mortgage payoffs—all of which reduce net profit.

Tax Implications When Selling Investment Property

Profits above your adjusted cost basis are taxed as capital gains. Holding property over one year qualifies for lower long-term capital gains rates, whereas sales within a year are taxed as ordinary income, generally at higher rates.

Taxation of Income from Real Estate Investment Trusts (REITs)

REIT investors receive income as dividends (taxed as ordinary income), capital gains distributions (taxed at capital gains rates), and returns of capital (generally not taxed).

Tax Considerations for Rental Income

Rental income must be reported on IRS Schedule E. You can deduct related expenses to calculate net income or loss, with losses deductible within certain limits.

Final Thoughts

Calculating ROI is crucial for assessing your real estate investment performance and comparing it with other opportunities like stocks. While the examples provided simplify calculations, actual ROI will depend on all costs and income associated with your property.

For precise tax guidance, consulting a qualified accountant or tax professional experienced with real estate is highly recommended.

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