ROI stands for Return On Investment. ROI is the percentage return you make on your investment (cash) that you put into a property purchase, after considering all expenses.
The calculation (see below) includes all expenses, including finance costs but normally excludes tax, involved in running the investment property. Similarly, all purchase costs are included in the investment figure used.
It is the comparison between the cash you put in and cash you get out (per year).
( ([annual rental income] - [annual expenses]) / [total cash investment]) * 100 = [ROI]
ROI is represented as a percentage.
Here's an example...
Income and expense details:
Rent (annual): £9,900 (monthly rent: £825)
Mortgage payments (annual): £3,300
Managing agent, maintenance, voids (estimated, annual): £1,485
Total annual costs: £4,785
ROI: ( (9900 - 4785) / 58500) * 100 = (5115 / 58500) * 100 = 0.0874 * 100 = 8.74%
You can use the free PaTMa buy-to-let yield calculator to do this calculation for you.