ROI (Return on Investment)
Measuring the profitability of your real estate investment
ROI (Return on Investment) is the ultimate measure of how well your real estate investment performs. It combines all sources of returns: rental income, tax savings, mortgage paydown, and appreciation.
The Complete ROI Formula for Real Estate
ROI = (Annual Cashflow + Equity Gained + Tax Savings) / Initial Investment
Annual Returns Include:
- • Net rental income after expenses
- • Mortgage principal paydown (equity gain)
- • Tax savings from AfA and interest deductions
- • Property appreciation (unrealized until sale)
Initial Investment:
- • Down payment (Eigenkapital)
- • Closing costs (notary, property transfer tax)
- • Renovation/furnishing costs
Real Example
Investment Property ROI Calculation:
Initial Investment:
- Down payment (20%):€100,000
- Closing costs:€15,000
- Total investment:€115,000
Annual Returns (Year 1):
- Net rental income:+€1,200
- Tax savings (AfA):+€3,360
- Mortgage paydown:+€6,000
- Appreciation (3%):+€15,000
- Total return:€25,560
(€25,560 returns / €115,000 invested)
Why Real Estate ROI is Powerful
Real estate offers unique advantages that multiply returns:
- Leverage: You control a €500k asset with only €115k down, amplifying percentage returns
- Multiple return streams: Rental income + appreciation + tax savings + equity paydown
- Tax advantages: AfA, interest deductions, and tax-free appreciation after 10 years
- Forced appreciation: You can increase value through improvements
Comparing to Other Investments
Stock Market ETF:
- • Historical return: 7-8% annually
- • No leverage (1:1 investment)
- • Capital gains taxed at 26.375%
Real Estate (Leveraged):
- • Effective ROI: 15-25% annually (with leverage)
- • 5:1 leverage typically available
- • Tax-free gains after 10 years
Related Terms
Cashflow
Cashflow is the net amount of money flowing in and out of your property investment. Positive cashflow means rental income exceeds all expenses; negative cashflow means you pay out of pocket monthly.
Rental Yield(Mietrendite)
Rental yield measures annual rental income as a percentage of property value. Gross yield uses total rent; net yield subtracts operating expenses and taxes.
Appreciation(Wertsteigerung)
Appreciation is the increase in property value over time due to market forces, inflation, and improvements. In Germany, real estate has historically appreciated at 3-4% annually.