The two most common ways to calculate return on investment (ROI) in commercial real estate are the cost method and the out-of-pocket method.
The cost method is calculated by taking the total cost of the investment (including any loan payments, closing costs, and other expenses) and subtracting it from the total return (including any rental income, capital gains, and other income). The result is the net return on investment.
The out-of-pocket method is calculated by taking the total out-of-pocket expenses (including any loan payments, closing costs, and other expenses) and subtracting it from the total return (including any rental income, capital gains, and other income). The result is the net return on investment.
In addition to these two methods, investors can also look at a property’s cash on cash returns, its cap rate, or even its gross rent multiplier (GRM) to determine ROI.