ROI (Return on Investment)

Return on Investment (ROI) is a broad measure of the total return from an investment. For property, it typically combines rental income (net of costs) and capital appreciation over the holding period, expressed as a percentage of the total cash invested.

ROI formula: ((Total net income + Capital gain) / Total cash invested) x 100

ROI is useful for comparing a property investment against other asset classes over a defined period. However, it has significant limitations: - Capital appreciation is assumed, not guaranteed. Future property values are uncertain. - ROI figures are often presented with optimistic assumptions (high capital growth, no voids, minimal maintenance). - ROI as typically presented does not discount for the time value of money (see Discounted Cash Flow for a more rigorous approach).

A more conservative approach is to base investment decisions primarily on cashflow (measurable, real) and treat capital growth as a bonus rather than an assumption. Properties that only work if you assume capital growth are higher-risk propositions than those that produce positive cashflow without any appreciation.

For honest comparison, always calculate ROI with and without capital growth. If the deal only shows a good return because of assumed capital growth, ask yourself how confident you are in that assumption.