What Is Return On Investment (ROI) and Why Is It Important To Know?

Return on Investment
Return on Investment

Return on investment, or ROI, is the ratio of a profit or loss made in a financial year that is expressed in terms of an investment and shown as a percentage of increase or decrease in the value of the investment.

The basic formula for ROI is: Net Profit / Total Investment * 100.

Return on investment is often referred to when purchasing a property to determine the viability of profits and stability of returns.  However, ROI calculations can also be beneficial to investors when considering improvements, renovations or the purchase of new fixtures or fittings to determine the return on investment.

As an investor it is necessary ‘at regular intervals’ of owning a property to upgrade and replace fixtures and fittings.  An astute investor will take advantage of this, to upgrade the fixtures and fittings to complement the depreciation benefits available to maximise potential tax returns and create more money in their bank accounts.  When improving, renovating or upgrading a property you can use this formula to determine the viability of the addition.

For example: If you invest $15,000 on improvements to the property that results in a $50 rent increase per week the ROI on would be 17.3%.

Calculation: $50 rent increase x 52 weeks = $2,600 / $15,000 * 100.

The average rate of return on an investment is often considered at 10.6% according to many investment specialists.

IMPORTANT:  This is not advice.  Clients should not act solely based on the material contained in this post.  Items herein are general comments only and do not constitute or convey advice per se.  Every effort is made to ensure the contents are accurate at the time of publication.  Clients should seek their own independent professional advice before making any decision or acting. We take no responsibility for any subsequent action that may arise from the use of this newsletter. Published by the PPM GROUP – www.ppmgroup.com.au