You’ll need a spreadsheet or a real estate evaluation software to calculate this ratio. I think it’s highly useful because it allows me to compare the return I’m expecting for the investment vs. the return I would reasonably expect for other, dissimilar investments. For example: if I ran the numbers for the property I described at the beginning of this article and it kicked back to me a rate of return of 8% I’d surely pass.
I can expect to get 8% investing on the stock market (lower risk, and a whole lot less effort). For the risk and effort I’d have to put into this project I’d expect a rate of return well north of 20%.