Lawrence Mak Real Estate Sales Representative
RE/MAX Realtron Realty Inc., Brokerage Independently owned and operated
Office: (416) 745-2300Mobile: (416) 276-4895

Return on Investment

The rate of return, or ROI, is simply your profit (or loss) based on how much you initially invested.

 

If you plan on investing (and you should!) you need to intuitively understand ROI and how to calculate it for more complex situations.

The reason why is because you can use ROI as a comparison between investments, whether the investment is real estate, stocks or a new company.

I’m going to go through a few examples to illustrate the important of a few ROI concepts.

 

Example 1: Simple Rate of Return

The formula for Rate of Return is:

Rate of Return (ROI) = $ Profit / $ Investment

So, let’s pretend at Bank A, you have $10,000.00 in a savings account and at the end of year you gain $200.00 in interest.

Investment

Annual Interest

Rate of Return (ROI)

Bank A

$200.00

2.0%

 

Your Rate of Return (ROI) = $200.00 / $10,000.00 = 0.02 or 2.0% profit.

Therefore, at this bank, your investment would have an ROI of 2.0%.

 

Example 2: Comparison of Rate of Return

Now, let’s pretend there are two banks.

Investment

Annual Interest

Rate of Return (ROI)

Bank A

$200.00

2.0%

Bank B

$250.00

2.5%

 

Based on the calculation in example #1:

                  Bank A has an ROI of 2.0%

                  Bank B has an ROI of 2.5%

Therefore, Bank B would be the better investment because an ROI of 2.5% is greater than 2.0%.

 

Example 3: Rate of Return with Expenses

Investment

Annual Interest

Annual Bank Fees

Net Profit

ROI

Bank A

$200.00

No Fees

$200.00

2.0%

Bank B

$250.00

$60

$190.00

1.9%

 

To calculate profit, you subtract the expenses (bank fees) from the income (interest).

ROI for Bank A = $200.00 / $10,000.00 = 2.0%

ROI for Bank B = ($250.00 - $60.00) / $10,000.00 = 1.9%

Unlike example #2, the ROI for Bank A is better than the ROI for Bank B eventhough Bank B gives more interest.  This is because Bank B also charges more fees, so your net profit isn’t as great.

 

Example 4: Rate of Return with Expenses and Taxes

Investment

Annual Interest

Annual Bank Fees

Taxes

Net Profit

ROI

Bank A

$200.00

No Fees

$50.00

$150.00

1.5%

Bank B

$250.00

$60.00

$30.00

$160.00

1.6%

 

Lastly, depending on the type of asset you are investing in, different tax rates may apply.  For this ROI calculation, treat taxes exactly like an expense.

ROI for Bank A = ($200.00 - $50.00) / $10,000.00 = 1.5%

ROI for Bank B = ($250.00 - $60.00 - $30.00) / $10,000.00 = 1.6%

Therefore, Bank B is again the best investment vehicle once the ROI is adjusted for taxes.

What does this all mean?

These calculations may seem simple, but they contain very important information in more complex situations.

When calculating ROI, you need to consider all the expenses and the implication of taxes. Taxes play a large role in terms of the net profit.

Taxes are treated differently depending on the asset class.  In particular, some of the major taxes you need to consider when dealing with real estate are:

• Provincial land-transfer tax

• Municipal land-transfer tax

• Personal income tax

• Capital Gains

• Capital Gain exemption for a Principal Residence

• Harmonized sales Tax (HST)

It is highly recommended that you seek professional opinion from a Certified Professional Accountant (CPA) when buying or selling real property.

 

Lawrence Mak Real Estate Sales Representative
RE/MAX Realtron Realty Inc., Brokerage Independently owned and operated
Office: (416) 745-2300Mobile: (416) 276-4895

Trademarks owned or controlled by The Canadian Real Estate Association. Used under license.

The information provided herein must only be used by consumers that have a bona fide interest in the purchase, sale or lease of real estate and may not be used for any commercial purpose or any other purpose.

Information is deemed reliable but is not guaranteed accurate by TREB.

Toronto Real Estate Board - IDX Last Updated: 4/21/2018 1:33:53 AM