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Key takeaways

A key aspect in determining how to calculate ROI accurately in your specific situation is understanding what is considered a standard cost or gain. Here are some important things to know:

• ROI, which stands for return on investment, is the ratio of your net income to the cost of your investment.

• From online calculators to property analysis software, analytics platforms, and other financial tools, you can find a wide range of options to quickly and accurately calculate the ROI for the project, product, or investment decision you鈥檙e facing.

• You can use ROI calculations to make more strategic business decisions and accurately assess the effectiveness of those you鈥檝e already made.

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What does ROI stand for?

ROI stands for return on investment and is usually expressed as a percentage. It is the ratio of your net income to the cost of your investment. This percentage represents the money your business will generate from its investments or purchases, helping you measure profitability.听

ROI is an internal analysis and is used to predict the success of potential investments and gauge the effectiveness of existing ones. You generally use ROI when evaluating the performance of standalone projects rather than the operational performance of your entire business.

Importance of ROI

Knowing how to calculate and analyze ROI can help you make more strategic business decisions and accurately assess the effectiveness of those you鈥檝e already made. Depending on your role within a company, ROI can help you make a case for a project you want to pursue, provide insight into your team鈥檚 performance, or identify which projects and expenditures you should move forward with. Consider calculating ROI before and after every large investment you make to determine how much profit that investment will realize.听

Types of ROI calculations

Types of ROI calculations include situation-specific calculations and those tailored to individual use cases, such as marketing, operations, sales, software as a service (SaaS), or customer success, among other areas. Different industries often require specialized ROI calculations to provide data that highlights the potential financial impact and value of decisions specific to their unique needs.听

Annualized rate of return formula

Certain situations may require special types of ROI calculations, such as an annualized ROI, which takes into account the length of time the investment is held. The annualized return formula is as follows:

Annualized ROI = [(1 + ROI)^1/n - 1] x 100

In this calculation, n = the number of years the investment is held. Annualized rate of return makes it easier to compare investment performance, especially between two different investment types.听

What is the formula for calculating ROI?

In most situations, you can use either of these formulas to calculate ROI:

ROI = (net profit / cost of investment) x 100

ROI = [(final value of investment - initial value of investment) / cost of investment] x 100

Who uses ROI calculations?

ROI calculations are essential across various industries for businesses, investors, decision-makers, and anyone seeking to effectively pitch their idea to stakeholders. Whether you are looking to buy or sell a business or home, deciding on a marketing strategy, pitching a project idea, or weighing the pros and cons of investing in a rental property, solving for ROI on your purchase, investment, or project can provide the data you need to confidently make your decision.听

How to calculate ROI in different scenarios

While ROI is a standard tool that you can apply to anything with a cost and a potential for gain, understanding the definition of cost or gain as it pertains to your scenario is key. Though a somewhat simple ratio of income to cost, one investor may include capital expenditures, taxes, and insurance in their costs, whereas another may only include purchase prices.听

As you explore the following scenarios for calculating ROI, consider the income and costs included in each, as well as those not included. These scenarios highlight only a small sample of the variables you might encounter as you decide how to calculate ROI for your situation.听

How to calculate ROI for a project

When calculating ROI for a project, it is essential to distinguish between an anticipated ROI, which is calculated before the project begins, and an actual ROI, which is determined after the project is completed. You calculate the anticipated ROI using estimated costs and revenues to predict an expected profit. You calculate actual ROI after your project is completed using the same formula, but replacing estimations with actual final expense and revenue numbers, which reflect your true return on investment.

The basic formula to calculate ROI for a project is as follows:

ROI = [(project revenue - project cost) / project cost] x 100

Project ROI example (anticipated)

You are weighing whether to accept a landscaping project based on its profitability. Your revenue, estimated costs, and ROI are as follows:

• Revenue: $200,000

• Estimated costs (labor, fuel, materials, permits): $125,000

• Project ROI: 60 percent

听[(200,000 - 125,000) / 125,000] x 100

(75,000 / 125,000) x 100

.6 x 100 = 60%

How to calculate ROI on investment property

The method you choose to calculate ROI on investment properties depends on factors such as how you intend to use the property and whether you purchased the property outright or used financing. ROI can help you evaluate whether to buy an investment property or determine which one may be more profitable.

How to calculate ROI in real estate investment

Real estate ROI can reflect long-term growth potential and measure the profitability from various sources, including appreciation, rental income, and resale value, relative to the total investment cost (purchase price, taxes, and improvements).

To calculate the ROI for a real estate investment, you can use the following formula:

ROI = (investment gain - investment cost) / investment cost

Example

You purchased a home for a total price of $300,000 and completed a $40,000 remodeling project while you owned the house. Over the course of five years, your home鈥檚 value increased to $400,000, appreciating by $100,000, and you have now decided to sell for $400,000.听

• Investment cost (purchase price, improvements): $340,000 = $300,000 + $40,000听

• Investment gain (sales price): $400,000

• ROI: 18 percent

[400,000 - (300,000 + 40,000) / (300,000 + 40,000)] x 100

[(400,000 - 340,000) / 340,000] x 100

(60,000 / 340,000) x 100

鈮� .18 x 100 = 18%

How to calculate return on rental property

To understand your return on a rental property investment, consider using a cash-on-cash ROI measure. By comparing the yearly rental income to your total cash investment, including your upfront investment costs and annual operating costs, you can assess how well your initial investment is performing. A cash-on-cash ROI measures income potential and does not take property value or long-term appreciation into account.

ROI = [(annual rental income - annual operating costs -听annual mortgage payments) / total investment] x 100

Example

You purchased a property for $100,000 with the intention of renting it for passive income. Your closing costs were $10,000, and you made a $20,000 down payment. You also spent $10,000 on property renovations. You anticipate collecting monthly rent of $1,000 and are estimating monthly operating expenses at $300.

• Annual rental income: $12,000

• Annual operating costs (maintenance, property management): $3,600

• Annual mortgage payments (principal + interest): $5,153

• Total investment (closing costs, renovations, down payment): $40,000

• ROI: 8 percent

[(12,000 - 3,600 - 5,153) / 40,000] x 100

(3,247 /40,000) x 100

鈮� .08 x 100 = 8%

How to calculate ROI for digital marketing

When calculating ROI for a marketing campaign, whether digital or otherwise, ensure that you're comparing the profits resulting from your marketing efforts to the money you spent on the campaign.听

To calculate ROI for digital marketing, you can use the following formula:

ROI = (sales revenue generated by marketing - marketing costs) / marketing costs x 100

Digital marketing ROI example

You create a video about a sales promotion you are running for an upcoming holiday and post it on several digital platforms. The video includes a tracking link that leads to the shopping app connected to your website. After the video ad stops running, you compare the number of items sold during its run to the costs of producing the video and sharing it across the digital platforms you used.

• Sales revenue from marketing: $12,500

• Marketing costs (video production, ad space): $5,000

• ROI: 150%

[(12,500 - 5,000) / 5,000] x 100

(7,500 / 5,000) x 100

1.5 x 100 = 150%

Return on invested capital calculation vs. ROI calculation

To calculate ROI, you need to know your net income or profit and the cost of your investment. Calculating return on invested capital (ROIC), on the other hand, requires your net operating profit after tax (NOPAT) and your invested capital.

To calculate ROIC, first determine your NOPAT:

NOPAT = Operating income x (1 - tax rate)

You can then use NOPAT, along with invested capital, to calculate your ROIC:

ROIC = NOPAT / Invested capital

Read more: Maximizing Returns: The ROI of Learning and Development in Corporate Training

Tools and resources for easier ROI assessment

From online calculators to property analysis software, analytics platforms, and other financial tools, you can find a wide range of options to quickly and accurately calculate the ROI for the project, product, or investment decision you鈥檙e facing. Consider the following options:

Online calculators

• BiggerPockets ROI calculator: Offers detailed inputs for rental income, expenses, financing, and appreciation.

• Mashvisor rental property calculator: Estimates cash flow, cap rate, and ROI using market data.

• Realtor.com investment tools: Provides rental estimates and expense breakdowns for quick ROI snapshots.

Property analysis software

• Stessa: Tracks rental income, expenses, and ROI automatically from linked accounts.

• Roofstock: Compares expected returns across potential rental properties.

• Realty Capital Analytics real estate financial models: Use Excel-based models to streamline deal analysis, enabling data-driven decision-making that leads to better returns.听

Analytics platforms

• Google Analytics: Measures ROI from marketing campaigns, conversions, and user behavior.

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• HubSpot ROI calculator: Tracks marketing spending versus generated revenue.听

• Databox: Create dashboards that visualize ROI across different business metrics.

Financial tools

• QuickBooks: Integrates accounting data to calculate ROI from profit margins and capital investments.

• Microsoft Excel: Customizable ROI models with prebuilt formulas.

Explore free resources for improving your business decision-making

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