Question on mortgage payments and ROI
Hi everyone,

First, I am sorry if this does not belong here - I will gladly take this post down if that's the case.

Anyway, I am putting together a simple model for one of my real estate classes that analyzes the ROI of a rental property over the 30 year life of a mortgage.  The way I understand it, to calculate ROI, I would need to do Net Operating Income / Total Equity.

In my model, I have the following:

- NOI = Annual Rent - Annual Expenses (management, repairs, etc) - Annual Taxes - Interest Expense
- Total Equity (Year X) = Initial down payment in Year 0 + accrued principal payments through year X

In this case, the ROI decreases over the life of the loan as the equity increases throughout - does this make sense?

Additionally, how would I account for the property value increasing in my ROI calculation?

Thanks!
[{"id": "ci0q8h7", "text": "ROI is return on your initial investment, not return on your equity at any given point. You wouldn't divide by your equity, you would divide by your investment.\n", "replies": [{"id": "ci0rj2q", "text": "Cool, thanks. So do principal payments get subtracted from your NOI? Where do these payments fit into the equation?", "replies": [{"id": "ci0v26h", "text": "If you're looking for ROI, principal is just part of the expenses, so yes, it gets subtracted from NOI.\n\nEquity doesn't go into the equation at all- your change in equity doesn't really matter until it's sold- just like how the value of the property doesn't matter until the property is sold.\n\n", "replies": [{"id": "ci1itxw", "text": "Great, thanks!", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}]