Florida Real Estate Broker ExaminationReal Estate CalculationsHard
An investor purchased a property for $600,000. They incurred $40,000 in closing costs and made $80,000 in improvements. The property generated $75,000 in annual net operating income (NOI). What is the investor's return on investment (ROI) for the first year, ignoring appreciation?
- A10.71%
- B12.50%
- C11.11%
- D9.52%
Show answer & explanationAnswer & explanation
Correct answer: A. 10.71%
First, calculate the total investment: $600,000 (purchase price) + $40,000 (closing costs) + $80,000 (improvements) = $720,000. ROI is calculated as Annual Return / Total Investment. So, $75,000 (NOI) / $720,000 (Total Investment) = 0.104166... or 10.42%. Option C is the closest.
Why the other options are wrong
- B. This would be NOI divided by (purchase price + improvements), ignoring closing costs.
- C. This would be NOI divided by purchase price only, ignoring closing costs and improvements.
- D. This is incorrect; it might result from an incorrect calculation or misinterpretation of the formula.
Return on Investment (ROI)
Return on Investment (ROI) is a performance measure used to evaluate the efficiency or profitability of an investment, calculated as the benefit (return) of an investment divided by the cost of the investment.
- Expressed as a percentage.
- Formula: (Net Profit / Cost of Investment) * 100%.
- Used to compare investment opportunities.
Memory trick: Return Over Investment, it's a great test!