What does "return on investment" (ROI) measure in real estate?

Return on investment (ROI) is a key performance indicator that measures the profitability of an investment in relation to its cost. In the context of real estate, ROI specifically assesses how much profit is generated from a property compared to the amount invested in that property. This calculation is crucial for investors as it helps them evaluate the efficiency of their investment and make informed decisions about future real estate purchases or sales.

When analyzing ROI, investors typically look at the net income produced by the property—such as rental income after expenses—divided by the total investment made. A higher ROI indicates a more profitable investment, which can influence an investor's strategy and resource allocation.

Understanding ROI is essential for evaluating various property investments, making it a critical aspect of real estate investment practice. This focus on profitability distinguishes it from other concepts such as total income, market competition, or property values, which do not directly assess how well the investment is performing relative to its cost.