How do you know if you are getting a good return on your real estate investment? Calculating the ROI on your investment property is critical to knowing how your investment is performing, or when comparing one investment to another.
In order to successfully decide whether a property is worth buying, an investor must run the numbers to calculate two types of returns: Cash-on-cash return on investment, and total return on investment.
Cash on Cash Return on Investment
The cash on cash return on investment is the before-tax cash flow (BTCF) divided by your initial cash investment. The formula looks like this:
Cash on Cash Return on Investment = BTCF / Initial Cash Investment
Your before-tax cash flow is calculated by subtracting your annual mortgage payment from your net operating income (NOI). The net operating income is simply the total income from the property minus the total expenses.