Calculating Return on Investment

This is very important for any investment. To keep it simple, let me give you an example. Lets say we buy a property that is worth 100,000 euro/sterling. Lets say we put down 10,000 as a deposit and we rent it for 500 per month.


We multiply 500*12= 6000 assuming its rented all year.

We then divide 6000 by 10,000 the amount of money (out of our own pocket) that we paid.

This works out at 0.6 = 60% sounds good right? Not really, we didn't take into account mortgage payments and other expenses. Lets realistically say (at the moment) that a mortgage (with expenses) would cost you 400 euro/Stg per month per 100,000. Now we minus 400 from 500 giving us 100 profit per month (before tax) thats 1200.

1200/10,000 = 12% still ok?Lets divide that again by 12 months making that 1% per month. Not good.

For me, I look for ideally 10% per month, not per year.

I use this calculation for any investment. Ideally i want to be earning about 7 to 10% per month and ideally I want to use the least amount of my own cash as possible.

Let me demonstrate. If we take our example above and we paid 2000 instead of 10,000 as a deposit and we still made 6000 in rent minus our expenses (that gives us 1000), then (1000/2000)*100%)= 50%/12 = 4.16%. per month.

This is a bit more realistic, but whenever you calculate roi, make sure it takes into account all expenses


Graham