Capital invested ROI

Capital Invested ROI shows how effectively the investor’s personal funds are generating profit. It’s especially useful when leverage (such as mortgages or loans) is used to finance a property, as it reflects the return on the investor’s actual out-of-pocket capital rather than the entire purchase price.

It helps investors assess the efficiency of their personal investment in comparison to alternative opportunities.

Leverage: The use of borrowed funds can significantly increase the Capital Invested ROI since the investor is only risking a portion of the property’s value while benefiting from potential capital gains and rental income.

Expenses and Risk: Include all relevant costs when calculating ROI and understand that higher leverage can also increase risk if property values or rental incomes decline.

Purchase Price ROI: Measures the return on the total property cost.

Equity: The amount of the property that the investor actually owns outright.

Gross Yield: Measures the return on investment from rental income before expenses.

Net Yield: Measures the return after expenses.

Advantages: Capital Invested ROI gives a clearer picture of the return on the actual cash the investor has put into the property, offering a more precise view of the investment’s performance, especially when loans or mortgages are involved.

Disadvantages: It doesn’t account for the overall profitability of the property if leverage or debt is used, as the ROI may appear inflated without considering risks from borrowed funds.

Investors use Capital Invested ROI to measure the return on their personal equity in a property, especially in cases where a mortgage is used to finance part of the purchase. For example, an investor may choose a property with a high Capital Invested ROI due to efficient use of leverage, even if the gross ROI appears lower.

Scenario: An investor who uses a mortgage to purchase a £200,000 property with £50,000 of their own money would use Capital Invested ROI to measure the return based on their personal investment rather than the full property price.

How is Capital Invested ROI different from Purchase Price ROI?

Capital Invested ROI is based only on the amount of personal funds invested, while Purchase Price ROI is based on the total cost of the property, including any borrowed funds.

What is considered a good Capital Invested ROI?

A good Capital Invested ROI varies by market, but many investors aim for returns above 10%–20%.

Capital Invested ROI can vary widely depending on the level of leverage used. Investors who finance most of their property through loans can sometimes achieve very high ROIs on their capital, but at the cost of increased financial risk.