(ROI) is an accounting term that indicates the percentage of invested money returned to an investor after the deduction of associated costs. For the non-accountant, this may sound confusing, but the formula may be simply stated as follows:

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But while the above equation seems easy enough to calculate, a number of variables including repair and maintenance expenses and methods of figuring leverage – the amount of money with interest borrowed to make the initial investment - come into play, which can affect ROI numbers.

The article below explains the two methods by which ROI calculations are made:

The Cost Method and the Out of Pocket Method

The Cost Method
The cost method calculates ROI by dividing the equity by all costs.

As an example, assume a real estate property was bought for $100,000. After repairs and rehab of the property, which costs investors an additional $50,000, the property is then valued at $200,000, making the investors' equity position in the property 200,000 - (100,000 + 50,000) = $50,000.

The cost method requires the dividing of the equity position by all the costs related to the purchase, repairs and rehab of the property.

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ROI, in this instance, is .33 % - $50,000 divided by $150,000.

The Out of Pocket Method
The out of pocket method is preferred by real estate investors because of higher ROI results.

Using the numbers from the example above, assume the same property was purchased for the same price, but this time the purchase was financed with a loan and a down payment of $20,000. Out of pocket expense is therefore only $20,000, plus $50,000 for repairs and rehab, for a total out of pocket expense of $70,000. With the value of the