If I buy a rental property with $100,000 in equity and every year it appreciates $5,000, has a net income of $5,000 and has principal paydown of $5,000, how would I calculate my ROI at the end of year 1?

The appreciation and principal paydown increase the amount of money I have invested in the asset. So should the ROI formula therefore be: $15,000/$110,000? Because the new amount of equity is $110,000? Or should that only be for the net income ($5,000/$110,000) & ($10,000/$100,000) and then combine the two results?

I'm confused about what should be considered the new amount invested in the asset at the end of each year so that I can accurately calculate ROI. Thank you very much for any help.

  • ROI means “return on investment”. How much did you invest? If you look at the bottom line after year one, how much equity do you have? – JTP - Apologise to Monica Mar 1 at 1:52
  • I would have $110,000 in equity. – user78003 Mar 1 at 2:00
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    Then what is “principal paydown”? I thought you were referring to a mortgage there. And I was asking what the down payment was. – JTP - Apologise to Monica Mar 1 at 2:02
  • The down payment is $100,000. At the end of year 1 the equity is $110,000 (down payment + appreciation + principal paydown). – user78003 Mar 1 at 2:11

Day 1: you have invested $100,000 and ignoring closing costs and sales expenses your return would be zero if you sell the next day.

Day 366: The value of the house increased by $5,000, and the mortgage balance also decreased by $5,000. That would mean that if you sell the next day you, again ignoring closing costs and sales costs, will walk away with a profit of $110,000.

But what did it cost you? Did the rent exceed the costs to own, or did you have to throw in money to pay the mortgage, fees, maintenance and repairs.

That answer will determine if the denominator of the equation will be only your initial cost, or more than the $100,000 because the income was too low.

If the rent was high enough then the numerator might also change because that extra cash might have been saved for a future year when an expensive item breaks.

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  • The source of my confusion is that in order to generate an income from the asset, the principal payments must be made and added to the total equity in the asset. Why would that not get added to the denominator of the ROI formula? – user78003 Mar 2 at 2:05

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