Financial
What is a ROI (Return on Investment)?
Author: Sage Outdoor Advisory
Quick answer
A performance measure that calculates the percentage return on an investment relative to its cost.
Understanding ROI (Return on Investment)
Return on Investment (ROI) is a fundamental financial metric that measures the profitability of an investment. It's calculated by dividing the net profit (or gain) from an investment by the initial cost, then multiplying by 100 to get a percentage.
ROI helps investors compare different investment opportunities and assess whether an investment is worthwhile. For outdoor hospitality properties, ROI considers both income returns and potential appreciation.
ROI can be calculated for different time periods (annual ROI, 5-year ROI, etc.) and can include or exclude factors like financing costs, taxes, and appreciation. It's often used alongside other metrics like cap rate, IRR, and cash-on-cash return.
Sage Outdoor Advisory includes ROI analysis in our feasibility studies, helping clients understand the potential returns on their outdoor hospitality investments.
ROI helps investors compare different investment opportunities and assess whether an investment is worthwhile. For outdoor hospitality properties, ROI considers both income returns and potential appreciation.
ROI can be calculated for different time periods (annual ROI, 5-year ROI, etc.) and can include or exclude factors like financing costs, taxes, and appreciation. It's often used alongside other metrics like cap rate, IRR, and cash-on-cash return.
Sage Outdoor Advisory includes ROI analysis in our feasibility studies, helping clients understand the potential returns on their outdoor hospitality investments.
Examples
- An investor purchases a glamping resort for $2M. After operating expenses and debt service, the property generates $200K in annual net profit. ROI = ($200K ÷ $2M) × 100 = 10% annually. Over 5 years, if the property is sold for $2.5M, the total ROI includes both the $1M in profit from operations ($200K × 5 years) plus the $500K appreciation, totaling $1.5M on a $2M investment = 75% total ROI or 15% annualized. This helps compare to alternative investments like stocks or bonds.
- A glamping resort investment analysis: Purchase price is $3.5M with $700K down payment (80% financing). Annual cash flow after all expenses is $105K. ROI on the cash investment = ($105K ÷ $700K) × 100 = 15% cash-on-cash return. However, total ROI including loan paydown and appreciation might be higher. If the property appreciates 3% annually ($105K) and loan principal paydown is $40K, total annual return is $250K on $700K investment = 35.7% ROI, demonstrating how leverage amplifies returns in real estate.
- Comparing ROI across investment options: Option A is a $1M all-cash campground purchase generating $80K annual profit = 8% ROI. Option B is a $2M glamping resort with $400K down generating $120K cash flow = 30% cash-on-cash ROI but lower absolute profit. Option C is stocks returning 10% annually. The ROI comparison helps investors choose based on risk tolerance, cash availability, and return expectations, with higher ROI often correlating with higher risk or leverage.
Common use cases
- Investment analysis
- Feasibility studies
- Investment comparison
- Financial planning
Related services
Frequently asked questions
- How is ROI calculated?
- ROI = (Net Profit ÷ Investment Cost) × 100. It's expressed as a percentage.
- What's a good ROI for outdoor hospitality?
- ROI varies by property type and market. Generally, 10-20% annual ROI is considered strong for outdoor hospitality investments.
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