Return on investment (ROI) is the most quoted number in property talk, and also the most misused. The Corporate Finance Institute defines it as a ratio of the benefit an investor receives to the cost of the investment. The definition is simple. The trouble starts when people leave costs out, ignore how many years the money was tied up, or mix ROI with return on equity. This guide walks through the formula, an example, and the checks to run before you trust a figure.
The formula
Total cost of buying means everything that left your pocket to own the unit: the contract price, plus any registration fees, finishing, furnishing and similar extras you paid. If you only count the contract price, ROI looks better than it is. The Corporate Finance Institute warns about exactly this: an ROI figure can leave out costs such as maintenance, property taxes, sales fees or legal costs, and a true ROI accounts for all of them.
The third line matters for property. Basic ROI ignores time, so a 50% return over 3 years and the same 50% over 5 years look identical. The Corporate Finance Institute recommends comparing investments over the same period or using annualized ROI, which is the formula above.
Worked example
Illustrative example with hypothetical numbers.
| Item | Amount (EGP) |
|---|---|
| Contract price | 2,000,000 |
| Fees, finishing and other buying costs | 200,000 |
| Total cost of buying | 2,200,000 |
| Net rent per year (after costs) | 120,000 |
| Holding period | 5 years |
| Total net rent over 5 years | 600,000 |
| Sale price after 5 years | 2,800,000 |
| Selling costs | 50,000 |
| Net sale proceeds | 2,750,000 |
Note the gap between 52.3% in total and 8.8% a year. Dividing 52.3% by 5 gives 10.5%, which is wrong because it ignores compounding. That difference is large enough to change a decision, so always annualize when comparing a property with another use of the same money.
This guide's annual formula treats all rent as if it arrived at the end. Rent actually arrives every month, so the true annual rate is a little higher. For a planning estimate the simple version is fine; for a precise figure you need a dated cash flow.
ROI vs ROE: two different questions
CalcRealty has a calculator for each, because they answer different questions.
ROI looks at the whole deal from start to finish: everything you paid against everything you got back. It suits the question "was this purchase worth it overall?"
Return on equity (ROE) looks at one year. The Corporate Finance Institute defines ROE for a company as net income divided by shareholders' equity. Applied to a unit, your equity is the property value minus what you still owe on it (to a bank or to the developer). Annual ROE divides the year's net income from the unit by your average equity during that year. It suits the question "how hard is the money I have in this unit working this year?"
ROE example on a unit still being paid
Illustrative example with hypothetical numbers. The unit is delivered and rented, and 1,200,000 EGP of installments remain at the start of the year.
| Item | Start of year | End of year |
|---|---|---|
| Property value | 2,000,000 | 2,000,000 |
| Remaining installments | 1,200,000 | 1,000,000 |
| Equity | 800,000 | 1,000,000 |
The same 100,000 EGP is 5% of the unit's value but 11.1% of the money you have in it. Neither number is wrong; they measure different things. In this example the value was held flat on purpose, so the ROE reflects income only. A change in value shows up in your equity, not in the year's income.
Common mistakes
- Counting only the contract price as cost, and forgetting fees, finishing, furnishing and selling costs.
- Using gross rent instead of net rent. Vacant months, maintenance and management reduce what you actually receive (see the rental yield guide).
- Comparing a 3-year ROI with a 7-year ROI without annualizing.
- Dividing total ROI by the number of years and calling it the annual return.
- Using a hoped-for sale price as if it were known. The sale price is an assumption; test a lower one too.
- Presenting ROE as if it were ROI. A high ROE on a heavily financed unit also means more debt left to pay.
What to ask before trusting the result
- What exactly does the contract price include, and which fees, deposits or finishing costs are extra?
- When is delivery? Rent cannot start before it, which changes both ROI and ROE.
- What will the installment schedule leave unpaid at each year end? That drives your equity.
- Is the rent figure a signed lease, or an estimate? Who supplied it?
- What would selling cost you (broker fees, transfer fees, any developer resale terms)?
Frequently asked questions
Is a higher ROI always better?
Not on its own. A higher ROI over a longer period can be a lower annual return, and a high figure that depends on an optimistic sale price carries more risk. Compare annual ROI on the same assumptions.
Should I include the maintenance deposit in the cost?
If you pay it to own the unit, it is part of your cash outlay, so include it in total cost of buying. Read the contract for whether any part of it is refundable or credited back.
Why does ROE come out higher when I pay in installments?
Because the denominator is your equity, not the full value. While part of the price is still owed, your equity is smaller, so the same income is a larger percentage of it. The remaining installments are still an obligation.
Can ROE be negative or unavailable?
Yes. If yearly costs exceed income, net income is negative and so is ROE. If the remaining debt is equal to or above the property value, equity is zero or negative and the percentage stops being meaningful.
Which one should I use when buying off-plan?
Use ROI for the whole plan from first payment to sale, since there may be no income for years before delivery. ROE becomes useful once the unit produces income.
Run the numbers
The CalcRealty app has an ROI calculator and an annual return on equity (ROE) calculator, plus a payment plan calculator that lays out every installment with its date, amount and share of the price. Download CalcRealty on Google Play, free, in Arabic and English with amounts in Egyptian pounds. For context on specific areas, read the New Cairo guide and the North Coast guide. Before you plug in costs, the total cost of ownership guide lists the extras that are easy to miss.
Results are planning estimates; the developer contract sets the final amounts.