How to Calculate ROI on Any Investment

Return on investment is the universal metric for measuring how effectively your money works for you. Whether you are evaluating a stock portfolio, a rental property, a business expansion, or a marketing campaign, ROI gives you a single, comparable number that tells you how much profit each dollar produced.

This guide walks you through the basic and annualized ROI formulas, demonstrates calculations across different asset types, and highlights the common pitfalls that lead to inaccurate ROI assessments.

What Is Return on Investment?

Return on investment (ROI) measures the profitability of an investment relative to its cost. It answers a fundamental question: for every dollar you invested, how many cents (or dollars) did you get back in profit? ROI is expressed as a percentage, making it easy to compare investments of vastly different sizes and types.

A positive ROI means you earned more than you spent, while a negative ROI means you lost money. An ROI of 0% means you broke even. The higher the ROI, the more profitable the investment was relative to its cost.

ROI is used across virtually every financial context: individual investors use it to evaluate stock and bond performance, business owners use it to assess the value of equipment purchases and marketing spend, and real estate investors use it to compare properties. Its simplicity is its greatest strength, though this simplicity also creates limitations that you need to understand.

The Basic ROI Formula

The standard ROI formula is straightforward:

Where net profit equals the current value of the investment minus the original cost. You can also express this as:

Step-by-Step ROI Calculation

Suppose you bought 100 shares of a stock at $50 per share ($5,000 total) and sold them two years later at $65 per share ($6,500 total). You also received $200 in dividends during the holding period and paid $20 in trading commissions.

1. Calculate total returns: $6,500 (sale) + $200 (dividends) = $6,700
2. Calculate total cost: $5,000 (purchase) + $20 (commissions) = $5,020
3. Calculate net profit: $6,700 - $5,020 = $1,680
4. Apply the formula: ROI = ($1,680 / $5,020) x 100 = 33.5%

Your total ROI over two years is 33.5%. For every dollar invested, you earned about 33.5 cents in profit. But was this a good return? To answer that properly, you need to annualize it.

Annualized ROI for Fair Comparisons

Basic ROI does not account for time. A 33.5% return over two years is very different from 33.5% over ten years. Annualized ROI converts total return into an equivalent annual rate, allowing you to compare investments held for different durations on equal footing.

The Annualized ROI Formula

Where ROI is expressed as a decimal (0.335 for 33.5%) and n is the number of years.

Continuing the stock example: Annualized ROI = ((1 + 0.335)^1/2 - 1) x 100 = (1.335^0.5 - 1) x 100 = (1.1553 - 1) x 100 = 15.5% per year.

That 33.5% total return over two years translates to approximately 15.5% annually, which is well above the historical stock market average of roughly 10%. Now you can meaningfully compare this result to a bond that returned 8% over three years or a real estate investment that returned 45% over five years.

Real-World ROI Examples

Example 1: Stock Market Investment

Rachel invested $25,000 in a diversified index fund in January 2021. By December 2025, her investment was worth $38,500, and she received $2,100 in reinvested dividends along the way.

• Total value: $38,500 + $2,100 = $40,600
• Total cost: $25,000 + $50 (fund fees over the period) = $25,050
• Net profit: $40,600 - $25,050 = $15,550
• Total ROI: ($15,550 / $25,050) x 100 = 62.1%
• Annualized ROI (5 years): ((1.621)^0.2 - 1) x 100 = 10.1%

Rachel earned a 10.1% annualized return, closely matching the historical stock market average. By investing in a low-cost index fund, she captured broad market returns with minimal fees.

Example 2: Real Estate Purchase

Tom purchased a rental property for $280,000, putting down $56,000 (20%) and spending $15,000 on closing costs and initial repairs. Over four years, he collected $72,000 in total rental income and spent $38,000 on mortgage interest, taxes, insurance, and maintenance. He then sold the property for $330,000.

• Total cash invested: $56,000 + $15,000 = $71,000
• Net rental income: $72,000 - $38,000 = $34,000
• Sale proceeds (after mortgage payoff of approximately $209,000): $330,000 - $209,000 = $121,000
• Total returns: $34,000 + $121,000 = $155,000
• Net profit: $155,000 - $71,000 = $84,000
• Total ROI: ($84,000 / $71,000) x 100 = 118.3%
• Annualized ROI (4 years): ((2.183)^0.25 - 1) x 100 = 21.5%

Tom's 21.5% annualized ROI outperformed stocks, but it came with significantly more work and risk, including tenant management, maintenance, and the illiquidity of real estate. Leverage (the mortgage) amplified his returns on the cash he actually invested.

Example 3: Small Business Marketing Campaign

Linda owns a bakery and spent $4,000 on a social media advertising campaign over three months. The campaign directly generated 320 new orders with an average order value of $35, totaling $11,200 in revenue. Her cost of goods for those orders was $5,600, and she paid $800 in additional labor costs to fulfill the surge in orders.

• Total revenue from campaign: $11,200
• Total costs: $4,000 (ads) + $5,600 (COGS) + $800 (labor) = $10,400
• Net profit: $11,200 - $10,400 = $800
• ROI: ($800 / $4,000) x 100 = 20%

Linda earned a 20% ROI on her marketing spend. While 20% in three months is respectable, she should also consider the lifetime value of those 320 new customers. If even 30% become repeat customers, the long-term ROI of the campaign is substantially higher than the initial 20%.

ROI Across Different Asset Classes

Understanding typical ROI ranges for different asset classes helps you set realistic expectations and compare your investments to relevant benchmarks.

Higher potential returns always come with higher risk. The stock market can lose 30% or more in a single year, as it did in 2008 and 2020. Real estate values can decline sharply during housing downturns. Small businesses have the highest potential ROI but also the highest failure rate. A balanced approach that diversifies across multiple asset classes typically produces the best risk-adjusted returns over time.

Limitations of ROI

While ROI is the most widely used profitability metric, it has several important limitations:

• Time is ignored in basic ROI. A 50% return over one year is vastly superior to 50% over ten years, but basic ROI treats them identically. Always use annualized ROI when comparing investments held for different periods.
• Risk is not captured. ROI tells you nothing about the volatility or probability of achieving that return. A 10% return from a savings account is far more reliable than a 10% return from a speculative stock, but both show the same ROI.
• Taxes and inflation are excluded. Pre-tax ROI overstates real returns. Long-term capital gains in 2026 are taxed at 0%, 15%, or 20% depending on your taxable income, while short-term gains are taxed at your ordinary income rate (up to 37%). Inflation further erodes purchasing power.
• Opportunity cost is invisible. ROI does not tell you whether a different investment would have been better. A 12% ROI sounds great, but if the broader market returned 18% during the same period, you actually underperformed.
• Cash flow timing is simplified. ROI assumes a single investment and a single return, but real investments often involve multiple cash inflows and outflows. For complex cash flows, use Internal Rate of Return (IRR) or Net Present Value (NPV) instead.

Tips for Improving Your ROI

Reduce Costs and Fees

Every dollar paid in fees is a dollar that cannot compound. Choose low-cost index funds with expense ratios below 0.10% when possible. Avoid actively managed funds charging 1% or more unless they have a proven, consistent track record of outperformance after fees. For real estate, negotiate closing costs and shop for competitive mortgage rates. For business investments, streamline operations to reduce overhead before seeking revenue growth.

Account for All Costs

An accurate ROI requires capturing every expense. For stocks, include commissions, advisory fees, and taxes. For real estate, include closing costs, property taxes, insurance, maintenance, vacancy periods, and property management fees. For business investments, include labor, overhead, and opportunity costs. Underestimating costs is the most common reason investors overstate their actual ROI.

Common Mistakes to Avoid

• Comparing ROI across different time periods without annualizing. A 30% return over five years is not better than a 20% return over two years. Always annualize for fair comparisons.
• Ignoring taxes when projecting returns. A 10% pre-tax return becomes roughly 8% after long-term capital gains tax for most investors. Factor in your specific tax situation when evaluating ROI.
• Chasing past performance. Last year's highest-ROI investment often underperforms the following year. Reversion to the mean is a powerful force in financial markets. Diversify rather than concentrating in recent winners.
• Forgetting about inflation. A 5% ROI during 3% inflation is really only a 2% real return. Use the inflation calculator to understand what your nominal returns mean in real purchasing power.
• Using unrealistic assumptions. Projecting 15% annual stock market returns indefinitely is not realistic. Use conservative assumptions (7% for stocks, 3% for bonds) to avoid overestimating future wealth.

Last updated: February 23, 2026