One of the most commonly used metrics to assess a transaction is ROI: return on investment. It’s a key figure often analyzed when making any kind of financial decision as well as reflecting on the success or failure of an investment.
It’s also a powerful number that addy uses in a forecasted timetable for an investment, but with power comes responsibility. Here’s how it works.
What is ROI?
Return on investment is the amount of money you receive back on an investment, on top of the initial amount put forth. If you invest $50 in an asset and later receive $75 in total, you earned a return on investment of $25. ROI is expressed as a percentage. In this example, since your ROI is $25 from the initial investment of $50, your ROI is 50%. Congrats!
ROI is not influenced by time and does not look at a single point in the lifetime of an investment. This simple and accessible metric just looks at the outflow and then at the inflow. Whether you get a return tomorrow or in ten years does not matter when calculating ROI.
How to use ROI
ROI can be used both as a forecasting tool as well as an assessment metric. For example, with a potential investment, an ROI may be calculated so as to help you decide whether that investment is worthwhile. Once you receive your actual return, you can use ROI to evaluate the success or failure of your investment. If an ROI forecast is positive, you stand to make some gains. If it’s negative, you’ll want to stay away from this potential loss.
It can also be used to compare investments. The simplicity of ROI makes it commonly used and ubiquitous, while its versatility makes it worthwhile. ROI can distill disparate investment opportunities into simple percentages to make comparisons easy. Determining whether to invest in a particular stock, cryptocurrency or real estate property is made easier with ROI despite these assets having very different traits.
How to calculate ROI
The ROI calculation is a fairly simple one when used in evaluation. Subtract your initial investment from your final investment (essentially your net, either positive or negative). Divide this number by the initial investment. Then simply multiply this number by 100 in order to express ROI as a percentage.
ROI limitations
As mentioned, ROI doesn’t involve time. So if you are comparing two ROI forecasts and they are similar, you may need to involve time as a deciding factor. Because of this, ROI doesn’t consider inflation, so longer-term investments may not be as profitable as they seem when simply looking at ROI.
What’s more, because ROI is a percentage, it doesn’t take into account your initial investment. A 200% ROI may be terrific, but the outcomes are very different if you’re investing $10 versus investing $10,000, for example. Still, a win is a win.
addy and ROI
Whenever addy features a new property, ROI is almost certainly an included metric (there may be some unique cases we’ll get to in a moment). The ROI is not guaranteed but instead a prediction and is one of the terms members can use in order to decide when to make an investment, and for how much.
For example, the estimated ROI for the second drop of our Maple View Heights purpose-built rental in Mission, B.C. was 203.38%. That means we forecast you receiving $203.38 on an investment of $100, on top of receiving your initial investment back. Now, this is only a forecast and not a guarantee. The real ROI may be lower (we hope not), but it could also be higher (fingers crossed).
Where’s the ROI?
A recent addy in Hamilton did not have an ROI attached to it. Why? Well, this project, a 96-unit, 100% affordable housing building in Hamilton, is to be held by the developer in perpetuity. There is no plan to sell the development. Members are foreseen to earn back their investment in two years with returns coming in annually based on rents from the property. However, since the General Partner does not plan to sell, there is no end date for the investment, and thus no end to the return.
This project also has a primarily societal impact as it looks to take 96 households off the affordable housing wait list. With annual distributions expected in year four, the financial benefit is secondary.
Invest with addy
By lowering the barriers to property ownership and real estate investing, addy makes it easy for the average Canadian to diversify their portfolio and potentially make some passive income. Only members can invest with addy, so be sure to sign up to get involved in our forthcoming properties.
This is a good explanation of ROI for new investors. ROI plus timing is what helps make the decision. Obviously all things being equal you want your ROI sooner then later. But high ROI might mean high risk too, so one must look at the chances the ROI estimate can be realized and what might get in the way of making that return.