Definition: Average ROI (Return on Investment) is a key financial metric that measures the profitability of an investment over time, averaged across different periods of ownership or investment. For rental properties, ROI is calculated by comparing the net income (after expenses) to the initial investment, expressed as a percentage. It helps property owners and investors assess how well their property or portfolio is performing in terms of generating returns. Formula: [ \text{Average ROI} = \left( \frac{\text{Annual Income} – \text{Annual Expenses}}{\text{Initial Investment}} \right) \times 100 ] This average value provides a general overview of the investment’s long-term profitability, helping investors to make comparisons with other potential investments. For example, an investor who calculates an average ROI of 8% per year on a rental property over 5 years is able to evaluate the success of their investment strategy and decide whether to continue holding, sell, or reinvest.
Example 1: An investor buys a rental property for $200,000, generates $15,000 in rental income per year, and incurs $5,000 in operating expenses annually. The average ROI over one year is: [ \frac{15,000 – 5,000}{200,000} \times 100 = 5\% ]
Example 2: Over 10 years, a rental property generates $120,000 in total income with $40,000 in total expenses. The initial investment was $150,000. The average ROI over this period is: [ \frac{120,000 – 40,000}{150,000} \times 100 = 53.33\% ]
Example 3: A real estate investor holds a commercial property for 3 years. The initial investment is $500,000, and the total net income over the period is $150,000. The average ROI over these 3 years is: [ \frac{150,000}{500,000} \times 100 = 30\% ]
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