How to Calculate Return On Investment on a Vacation Home

Businesses or entrepreneurs have one objective: to make a profit at the end of a trading period.

Investors, however, focus on one thing—making a positive return on their invested capital. This return is known as Return on Investment (ROI) .

What Is ROI?

ROI is the projected amount you will earn from your property after deducting all expenses. It represents the reward, in percentage form, that an investor receives for risking their capital.

For investors in rental or vacation homes, ROI is used to determine whether their investment is truly profitable. The higher the ROI, the more the investor is earning from the initial investment—meaning the market is compensating them well for their risk. 

How to Calculate ROI

ROI is essentially the difference between what you earn and what you spend.

To calculate it, two main inputs are used:

1. Net Operating Income (NOI) – This represents the revenue remaining after

paying all operating expenses. It is the most reliable metric to compare different

properties, even when financed differently.

Formula:

ROI (%) = Net Profit/Total Investment* 100

Operating Expenses

Operating expenses are the costs incurred to run and maintain your vacation home. They typically include:

● Property taxes: Annual taxes paid to the local government.

● Maintenance and repairs: Routine upkeep and minor fixes.

● Insurance: Property or rental coverage.

● Property management fees: Payments to someone managing guests or

bookings.

● Utilities: Electricity, water, gas, or internet if covered by you.

These expenses are subtracted from your rental income to calculate the Net Operating Income (NOI).

Appreciation

Appreciation is the increase in property value over time. It’s another key contributor to your overall ROI.

Formula:

Appreciation (%) = Current Market Value – Purchase Price/Purchase Price* 100

Example: If you bought a vacation property for ₹50 lakh and its current market value is ₹60 lakh:

Appreciation = 60,00,000 – 50,00,000/50,00,000*100 = 20%

When calculating ROI, you can add the monetary gain from appreciation to your net rental income.

Net Profit = Rental Income + Appreciation – Expenses

Total Investment

Total investment refers to the full amount of money you put into buying and preparing your property for rental income. It’s not just the purchase price—it includes everything that makes the property usable or rentable.

Component	Explanation	Example (₹)
Property Purchase Price	Cost of buying the property	₹80,00,000
Stamp Duty & Registration	Government registration charges	₹4,00,000
Legal & Due Diligence Fees	Lawyer and documentation costs	₹50,000
Renovation / Interiors	Painting, furniture, landscaping, etc.	₹5,00,000
Brokerage / Agent Fee	Commission to the real estate agent	₹1,00,000
Loan Down Payment	Your upfront payment (if financed)	₹20,00,000
Other Setup Costs	Security, smart devices, solar panels, etc.	₹1,50,000

Total Investment = ₹92,00,000

Example ROI Calculation

Assumptions:

● Purchase price: ₹80,00,000

● Total investment: ₹92,00,000

● Annual rental income: ₹6,00,000

● Annual expenses: ₹2,50,000

● Property value after 5 years: ₹1,00,00,000

Step 1: Calculate Net Profit

Net Annual Rental Income = ₹6,00,000 – ₹2,50,000 = ₹3,50,000

Total 5-year Rental Profit = ₹3,50,000 × 5 = ₹17,50,000

Appreciation Gain = ₹1,00,00,000 – ₹80,00,000 = ₹20,00,000

Total Profit (5 years) = ₹17,50,000 + ₹20,00,000 = ₹37,50,000

Step 2: Calculate ROI

ROI (%) = 37,50,000/92,00,000* 100 = 40.76%

Average Annual ROI ≈ 8.15% per year

A Measure of Profitability Over Time

ROI is a percentage that represents how much profit your investment generates per unit of time—typically per year. The basic formula remains:

ROI = Rental Income – Expenses/Total Investment*100

For example, if your annual profit equals half of your total investment, your ROI is 50%, meaning you’d recover your investment in just two years.

A good ROI for vacation rentals typically falls between 8% and 12%, depending on location, demand, and management efficiency. Anything above 15% is considered exceptional.

Key Takeaway

ROI is not just about how much revenue your property generates—it’s about how efficiently and consistently you can earn it. By tracking NOI, appreciation, and total investment, investors can make data-driven decisions and identify profitable vacation properties that deliver steady, long-term returns.