Florida Real Estate Broker ExaminationReal Estate Finance and InvestmentEasy
A real estate investor is analyzing a potential property and wants to determine the rate of return it generates relative to its cost. Which financial metric would be most appropriate for this purpose?
- AReturn on Investment (ROI)
- BLoan-to-Value (LTV) ratio
- CDebt-to-Income (DTI) ratio
- DDebt Service Coverage Ratio (DSCR)
Show answer & explanationAnswer & explanation
Correct answer: A. Return on Investment (ROI)
Return on Investment (ROI) is a performance measure used to evaluate the efficiency of an investment or compare the efficiency of several different investments. It directly relates the gain or loss from an investment relative to its cost.
Why the other options are wrong
- B. LTV ratio compares the loan amount to the property value, not the return.
- C. DTI ratio compares monthly debt payments to gross monthly income, used for borrower qualification.
- D. DSCR measures a property's ability to cover its debt payments, not the overall return to the investor.
Return on Investment (ROI)
A profitability metric that measures the amount of return on an investment relative to the investment's cost.
- Calculated as (Net Profit / Cost of Investment) * 100%.
- Expressed as a percentage.
- Used to evaluate investment efficiency and compare different investments.
Memory trick: ROI: Return Over Investment, for your money's gain.