# ROI (return on investment): Calculation, meaning, examples > Source: https://www.investbay.com/en/blog/roi-return-on-investment-calculation-meaning-examples · Part of InvestBay (https://www.investbay.com) · See /llms.txt for an overview. [Investing](https://www.investbay.com/en/news?investovani) # Return on investment (ROI): How to measure the key indicator of your investments' success August 13, 2024 Whether or not you know your way around the world of investing, you surely know that **investing is wise these days for various reasons.** But before you dive into it, it's good to have at least a basic overview – and that includes knowing what some of the basic investment terms mean. Today we'll break down **return on investment (ROI)**. What is it, how do you calculate it, and what value does it have for you in practice? Are there other investment indicators? And which one do we use at InvestBay? Find out in the article. ### What is ROI (return on investment)? **ROI (Return on Investment)** is an indicator of an investment's performance, with which you can evaluate its efficiency or profitability, or compare the efficiency of several different investments. How? It uses the ratio of the cost of the investment vs. the return (or earnings). #### What affects ROI? The key factors affecting ROI include: - the initial amount of the investment, - ongoing maintenance costs, and - the cash flow generated by the investment. #### The formula for calculating ROI You divide the investment's **net profit** (or, in the worse case, the **loss**) by its original cost and then multiply this number by 100. **You get a percentage.** The higher it is, the more profitable the investment. **Let's illustrate this with an example**, that is, a concrete **calculation of return on investment** for an ordinary purchase of an investment property. #### Example: Investing in real estate **1. Initial investment:** - Purchase price of the property: €100,000 - Renovation costs: €8,000 - Legal and administrative fees: €2,000 - Total initial costs: €110,000 **2. Income from the investment:** - Annual rent: €6,000 - Expected annual growth in the property's value: 3% (€3,000 per year) - Total annual return: €6,000 + €3,000 = €9,000 **3. Operating costs:** - Annual maintenance and management: €800 - Insurance: €400 - Taxes: €200 - Total annual operating costs: €1,400 **4. Net annual income from the investment:** - €9,000 (total annual income) - €1,400 (operating costs) = €7,600 **5. ROI calculation** - ROI = (Net annual income / Initial investment) * 100 - ROI = (€7,600 / €110,000) * 100 - ROI = 6.91 % **Result:** **The return on investment (ROI) is 6.91% per year**. This calculation includes both rental income and the expected growth in the property's value. In our experience, with ROI people often make the mistake (especially when calculating ROI for real estate) of confusing a 60% return with a 40% loss. An ROI of 60% means that** you've earned 60% on top of your original investment.** #### The significance of ROI for investors ROI is a popular metric thanks to its **universality and simplicity.** Essentially, you can use it as a basic measure of the profitability of any investment, and fairly quickly at that. Even so, ROI is just one of many investment indicators used to **evaluate the performance of investments. ** ### Payback period of an investment The second most common is the so-called **Payback Period**, or **the payback period of an investment.** It measures **how long it takes for an investment to pay for itself **out of the cash flows obtained. It does not, however, take into account returns after payback or the time value of money. #### Payback period of an investment: The formula Assuming the annual cash flows are the same: Payback period = initial investment / annual cash flow where the result **(the payback of the investment) is in years**. **The calculation of the payback period of an investment **then looks as follows: If you invest €400 and expect an annual cash flow of €80, the payback period is €400 / €80 per year = **5 years**. ### Comparing ROI with other investment indicators Below is a comparison of ROI with other significant investment indicators. Among them you'll also find an explanation of the one that* ***we use at InvestBay **for calculating the estimated return – **IRR**. - **ROE (Return on Equity)**: Measures the return on equity, i.e. how much profit a company generates for every euro of equity. While ROI evaluates the overall performance of an investment regardless of the source of financing, **ROE focuses only on the profitability of equity**. ROE is useful for shareholders who want to know how efficiently their invested capital is being used. - **ROA (Return on Assets):** Measures how efficiently a company uses its total assets to generate profit. While **ROI measures the return on the total investment**, ROA focuses **on the efficiency** of the use of a company's assets. ROA is useful for assessing how well a company uses its resources to create profit. - **IRR (Internal Rate of Return):** This is the discount rate at which the net present value (NPV) of all cash flows (income and expenses) from an investment equals zero. We use this indicator at InvestBay **to calculate and estimate future returns**. In other words: what we state in the section as the estimated return is the IRR. IRR takes into account the time value of money and provides a compound annual rate of return. Unlike simple ROI, which does not take time into account, IRR provides a deeper view of an investment's potential returns over time. - **NPV (Net Present Value):** Represents the difference between the present value of the cash flows received from an investment and the present value of the cash flows spent on the investment. NPV provides an absolute measurement of profitability and takes into account the time value of money. ROI is a percentage indicator and is simpler to calculate, but it may not provide as comprehensive a view of an investment as NPV. Each of these indicators has its **specific use and provides different perspectives** on an investment's performance. Investors often use a combination of these indicators to get a comprehensive overview of an investment's potential and risks. ### What is a good return on a real-estate investment? **There is no universal benchmark** that would tell you off the bat what a good return on an investment is. That's because several factors affect it. - **Risk tolerance:** Investors differ in their willingness to tolerate risk. Those who are more risk-averse may accept a lower **return on investment in exchange for greater stability and predictability of their investments.** On the other hand, risk-tolerant investors may strive for a higher return on investment, but are willing to accept greater uncertainty and volatility. - **Duration of the investment:** The investment's time horizon plays a significant role in determining what can be considered a good return on investment. **Longer-term investments usually require a higher ROI** to justify tying up capital for a longer period. Short-term investments may offer a lower return on investment, but provide liquidity and flexibility. - **Industry norms:** Different industries have different expectations regarding return on investment based on factors such as** market conditions, the competitive environment, and the regulatory environment.** For example, industries with high barriers to entry or substantial capital requirements may require a higher return on investment in order to attract investment. - **Personal goals:** Ultimately, what is considered a "good" return on investment depends on the investor's specific financial goals. Whether investors are striving for wealth accumulation, income generation, or capital preservation, they should adjust their return-on-investment expectations to their individual goals and circumstances. ### Return on investment at InvestBay The return on a real-estate investment at InvestBay is slightly different – it isn't linear over time. It has **two components**: - rent - total appreciation in price For each of the [investment properties](https://www.investbay.com/en/properties/) we offer, you see exactly the **expected annual appreciation of the property as well as the expected annual return from rent** in relation to the property's value. The calculated values are based on our thorough analysis. **You receive rent on an ongoing basis**, but these are rather small amounts. To be honest, with none of our current properties is it the dominant component. **The total appreciation in price **(or capital growth) then makes up most of your return and is realized at the end upon sale. Read more on our [How it works](https://www.investbay.com/en/how-it-works) page. ### How do we at InvestBay select properties? For that we have the most qualified people on the team – our real-estate expert [Andrew Thompson](https://www.investbay.com/en/blog/andrew-thompson-after-27-years-in-real-estate-i-know-how-to-minimise) has been active in the real-estate market for over 27 years. What do we insist on when selecting properties? - We stick to several proven criteria that stem from our many years of experience in this field. - We only choose projects/properties that already stand and for which we have enough data to assess their profitability. - Even though we look for projects with the greatest possible return, when we sense high risk from a project, we give preference to another. We simply do everything we can to make your money earn. **Give it a try**. We're as transparent as we can be, so you know what you're getting into.[Sign up](https://portal.investbay.com/sign-up) today and take a look at the current investment offering. You can start with €100, but you'll surely soon understand the advantages of investing with InvestBay firsthand and invest more. Know someone who is thinking about investing? Send them this article so they have the key facts in one place. ## Where to invest with InvestBay? ### Almresort Gartnerkofel Nassfeld Available now Austria estimated annual return: 6–8 % investment length: 7 years ### Wyndham Portocolom 2 Mallorca Available now Spain estimated annual return: 9.00 % investment length: 5 years ### Element Residence Bali - tranche 1 Available now Indonesia estimated annual return: 10.00 % investment length: 7 years ## More articles ### Where to invest €4,000? Options by goal and risk [Read full article](https://www.investbay.com/en/blog/where-to-invest-4000-eur) ### InvestBay's portfolio has entered a new phase 03 June 2026 [Read article](https://www.investbay.com/en/blog/investbay-s-portfolio-has-entered-a-new-phase) ### How to build the ideal investment portfolio – and why it must not lack real estate 10 September 2025 [Read article](https://www.investbay.com/en/blog/the-ideal-investment-portfolio-a-step-by-step-example-and-tips) Investing [All articles](https://www.investbay.com/en/news)