How to Calculate ROI (Return on Investment)

ROI (Return on Investment) is the universal yardstick for comparing the profitability of different investments or business decisions — a stock purchase, a marketing campaign, a piece of equipment, or a rental property. Because it is expressed as a percentage, it lets you compare completely different investments on equal footing.

The Basic ROI Formula

ROI (%) = ((Final Value − Initial Investment) ÷ Initial Investment) × 100.

Worked Example

You invest $50,000 in a business and later sell your stake for $75,000. ROI = ((75,000 − 50,000) ÷ 50,000) × 100 = (25,000 ÷ 50,000) × 100 = 50%. Your investment returned 50% of its original value as profit.

Annualized ROI — Accounting for Time

Basic ROI does not account for how long your money was tied up. A 50% ROI over 1 year is far better than a 50% ROI over 10 years. Formula: Annualized ROI (%) = ((1 + ROI)^(1/years) − 1) × 100. For the example above, if the 50% ROI took 2 years: Annualized ROI = ((1.5)^(1/2) − 1) × 100 ≈ (1.2247 − 1) × 100 ≈ 22.5% per year.

How to Calculate ROI on Rental Property

Rental property ROI is more nuanced because it includes both rental income and property appreciation, offset by expenses. A simplified formula: ROI (%) = ((Annual Rental Income − Annual Expenses + Annual Appreciation) ÷ Total Cash Invested) × 100. Example: a property purchased with a $50,000 down payment generates $12,000/year in rent, has $7,000/year in expenses (mortgage interest, tax, maintenance), and appreciates by $5,000/year: ROI = (($12,000 − $7,000 + $5,000) ÷ $50,000) × 100 = ($10,000 ÷ $50,000) × 100 = 20%.

What Is a Good ROI?

• •Stock market (long-term average): historically around 7–10% annually for a diversified index fund.
• •Real estate: 8–12% annual ROI is often considered good, factoring in both rental income and appreciation.
• •Business investments: 15%+ is commonly used as a benchmark, since business risk is typically higher than stocks or real estate.
• •Savings accounts/CDs: 3–5% is typical — low ROI but very low risk.

ROI vs Other Profitability Metrics

ROI is simple but has limitations — it does not account for risk, and basic ROI does not account for time unless you annualize it. For more nuanced investment decisions, metrics like IRR (Internal Rate of Return, which accounts for the timing of multiple cash flows) or NPV (Net Present Value, which accounts for the time value of money) are used by finance professionals. For most everyday comparisons, however, simple annualized ROI is sufficient and far easier to calculate.