The following is a visualization of the four different contributors toward Return On Investment (ROI) assuming the there was no leverage (no loan) involved.
For this example, we’ve assumed that we’re talking about buying a $200,000 property and putting 100% down (that’s $200,000 down). In other words… there is no loan. We paid cash for it.
If you pay cash for the property and the property goes up in value by 3% (that’s a 3% appreciation rate), what is the return on your investment from appreciation. As you can see in the image above, it is 3%. Why?
If a $200,000 property went up in value by 3% that means that it increased in value by $6,000. A $6,000 return on an investment of $200,000 is 3%. That’s how we calculate it.
In this case, we calculated an estimated cash flow on the property.