Rate of Return (ROR)
Definition:
Rate of Return (ROR) is the percentage of gain or loss on an investment over a specified period of time. It is a general measure used by real estate investors to evaluate how much profit or loss an investment generates relative to its initial cost. ROR can be calculated using different methods, depending on whether the investor wants to include cash flow, appreciation, and other factors.
🔍 Did You Know?
Rate of return is sometimes referred to as return on investment (ROI), though ROI usually refers to total return, while ROR can refer to returns over specific periods.
Examples:
Example 1:
An investor buys a property for $300,000 and sells it after five years for $400,000. The rate of return is:
[ ($400,000 - $300,000) Ă· $300,000 = 33.3% ]
Example 2:
A real estate investment produces $50,000 in rental income annually on an initial investment of $500,000. The ROR is:
[ $50,000 Ă· $500,000 = 10% ]
Why It’s Important:
ROR helps investors measure the profitability of their real estate investments. It’s a versatile metric that can be used to compare different investment opportunities or to track the performance of a property over time.
Who Should Care:
- Real estate investors evaluating potential returns on properties.
- Financial analysts assessing the profitability of investment portfolios.
- Lenders looking at the performance of financed properties.
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