How to Calculate ROI on Any Investment — The 2-Formula Method With Real Examples
Return on investment (ROI) sounds like a single calculation. In practice there are two different metrics, and using the wrong one produces misleading results. Here is the correct method for any investment type.
Formula 1: Simple ROI (use this for same-duration comparisons)
ROI = (Net Profit ÷ Total Cost) × 100
Net Profit = Final Value + Income − Total Cost
Total Cost = Purchase Price + All Fees + Additional Capital
Formula 2: Annualized ROI / CAGR (use this for cross-duration comparisons)
CAGR = (Final Value ÷ Initial Investment)^(1 ÷ Years) − 1
Five real examples:
Stock investment: $8,000 invested → $11,520 after 3 years (including dividends). Simple ROI: 44%. CAGR: 12.9%/yr. Beats S&P 500 average slightly.
Real estate (all costs): $310,400 total invested (purchase + closing + renovation) → $333,700 net proceeds. Simple ROI: 7.5% over 4 years. CAGR: 1.83%/yr. Underperforms HYSA at 4.7%.
Rental property: $60,000 down payment → $80 annual cash flow + $7,500 appreciation + $2,400 equity. Total annual return: $9,980. Annual ROI: 16.6%.
Small business: $20,000 invested → $27,000 net profit over 2 years. Simple ROI: 135%. CAGR: 53.3%/yr. Exceptional return with higher risk and time commitment.
CD: $10,000 × 5.1% APY × 4 years → $12,185. Simple ROI: 21.85%. CAGR: 5.1%/yr. FDIC-insured, zero risk.
Key takeaway: always use CAGR when comparing investments of different durations. Simple ROI alone favours investments held longer regardless of actual performance.
Free ROI calculator with benchmark comparison: 1onlinecalculator.com/roi-investment-calculator/