How do I calculate my ROI?

[Marty Gold]

Please assume this hypothetical:

I find a property for $200,000.

I get a mortgage for this property and put down 10 ($20,000).  

The property earns a net profit of $2,000 per year.  

What is my ROI?

Is my ROI 1%? (200,000/2,000)

Or is my ROI 10%?

(20,000/2,000)

Thank you 

[Ali Boone]

Well there's a few issues here. 

First is the issue of what is the actual definition of "ROI". You will see people create different versions of this term until the cows come home (usually in whatever ways make a property look more desirable). ROI is an extremely generic term and can be finagled however anyone wants to finagle it. Here's more on that-

https://www.biggerpockets.com/renewsblog/2013/04/0...

I recommend just tossing the term ROI and getting more specific. Ultimately what you really want to care about is the Cash-on-Cash Return of any rental property you are analyzing. This means the actual bang you are getting for the buck you are putting in. No speculation, no nothing (which ROIs love to want to include). How much return are you getting on the actual cash you are putting into the deal? That's what you care about. For that, skip the Cap Rate section of this and just skip to the Cash-on-Cash-

https://www.biggerpockets.com/renewsblog/2014/05/1...

Your actual ROI on this property would include things like eventual appreciation and tax benefits and such, but those are speculative and you don't want to base anything off of them.

The part you mention about $200,000/2,000 is more related to when you see people mentioning the 1% or 2% rules. But even then, it's slightly off because those rules apply to the gross rental income received monthly versus a net annual income. So I see where you are going with that one, but no, that one isn't what you want to focus on. Focus only on the cash-on-cash return.