Return On Investment (ROI) Explained

💡 In simple terms, ROI is the calculation of how much money you make compared to how much money you invested.

ROI (Return on Investment) is a financial metric that measures the performance of an investment, typically expressed as a percentage. It is calculated by dividing the net profit generated by the investment by the total cost of the investment, and then multiplying the result by 100.

Monthly ROI vs Annual ROI

Monthly ROI and annual ROI are both ways to measure the return on an investment over a certain period of time, but they differ in the length of the time period being measured. Monthly ROI measures the return on an investment over a month, while annual ROI measures the return over a year.

Monthly ROI is useful for short-term investments that have a quick turnaround, such as a short-term rental property. It provides a snapshot of the profitability of the investment on a monthly basis, which can help investors make decisions about whether to continue or adjust their strategy. However, it may not be as accurate in projecting long-term profitability as annual ROI.

Annual ROI, on the other hand, provides a more comprehensive view of the investment’s profitability over a longer time horizon. It takes into account seasonal variations, market fluctuations, and other factors that may impact the investment’s performance over a year. Annual ROI is often used to compare the performance of different investment opportunities and make strategic decisions based on long-term projections.

Both monthly ROI and annual ROI are useful metrics for measuring the return on investment in short-term rental properties, and investors should consider using both to get a complete picture of the investment’s profitability.

The Formula

The formula for calculating ROI is a simple one. It’s the revenue the property brings in, minus the investment you made, divided by the initial investment and if you want to see this as a percentage, you would multiply this number by 100.

(Revenue – Investment) / Investment x 100

Keeping track of your ROI is important, as it will give you an idea of how your property is performing and if it’s worth keeping or if it’s time to sell. Factors that can affect ROI include location, property type, and the number of guests you host.

  1. In Excel, create a new spreadsheet and label the following columns: “Total Revenue”, “Total Expenses”, “Net Income”, “Total Investment”, “ROI”.
  2. Enter the total revenue earned from the short-term rental property in the “Total Revenue” column.
  3. Enter the total expenses associated with the short-term rental property in the “Total Expenses” column. This should include all costs related to the rental property, such as mortgage payments, property taxes, utilities, insurance, repairs, maintenance, and management fees.
  4. Subtract the total expenses from the total revenue to calculate the “Net Income” for the short-term rental property.
  5. Enter the total amount of your investment in the property in the “Total Investment” column. This should include the purchase price, closing costs, and any other expenses related to the acquisition of the property.
  6. Calculate the ROI by dividing the Net Income by the Total Investment and multiplying by 100 to convert the result to a percentage. Use the following formula in the “ROI” column: “=((Net Income/Total Investment)*100)”
  7. Format the ROI column as a percentage to make it easier to read.

That’s it! Now you have an ROI calculator for your short-term rental property. You can update the revenue, expenses, and investment numbers as needed to see how changes in those factors impact your ROI.

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