I purchased a house with a detached garage. I remodeled the garage and now live in it. I rent out the house. My mortgage is $537 and I charge $650 to rent the house.
Doing the math, I'm only keeping $113. If my investment to remodel the garage was $20,000, then 1,356 (113 * 12 months) is my return or 6.78% ROI. But what do I call rest of the money (that which goes to the mortgage)? Would that be ROA? Because I'm not keeping the $537, but then again, I'm not paying any rent.
Basically, the ROI is most any method chosen. Otherwise, subtract the mortgage pay-off from the market-value of the property. Add in the development costs and divide the total rent-to-date by it.
Payment of mortgage interest is expense. Payment of mortgage principal is book-value gain or asset gain on the balance sheet but ultimately set against the use of cash.
Yearly revenue is $650 * 12. Subtract the yearly expenses to get the yearly net income. Then net-income divided by revenue is profit-margin.
There probably should be an industry-standard depreciation-for-future-renovation-cost. Depreciation is expense. Pay into a reserve account and set the depreciation expense yourself.
