Understanding your ROI is the key to knowing whether a commercial real estate investment is truly worth it.

When you invest in commercial real estate, one of the most important questions to ask is: “What kind of return can I expect?” The answer lies in ROI–Return on Investment. ROI helps investors measure profitability, compare properties, and make smarter decisions. 

In this guide, we’ll break down how to calculate ROI on commercial real estate investments, why it  matters, and common mistakes to avoid. 

What is ROI in Commercial Real Estate?

ROI measures how much money you earn relative to what you put in. In CRE, it is able to tell you whether a property is generating strong returns–or if your money could work harder elsewhere. 

Simple Formula:

Step 1: Calculate Your Net Operating Income (NOI)

Before you can measure ROI, you need to know your Net Operating Income. This is your property’s revenue after subtracting operating expenses (but before debt service and taxes). 

Formula: 

Step 2: Determine Your Total Investment

This isn’t just the purchase price–it includes all costs tied to acquiring and preparing the property.

• Purchase Price
• Closing Costs
• Renovations or improvements
• Upfront Fees

Example: If you purchased a property for $3,000,000 and spent $200,000 on improvements and $50,000 on closing costs, your total investment is $3,250,000.

Step 3: Apply the ROI Formula

Now divide your NOI by your total investment to calculate ROI.

Formula:

Example: $300,000/$3,250,000 = 0.092 ROI = 9.2%

Step 4: Adjust for Financing (Optional)

If you finance your property, you’ll want to calculate Cash-on-Cash Return, which factors in your actual cash outlay (down payment, fees) rather than the total purchase price.

Formula:

Example: If your cash flow after mortgage payments is $120,000 and your cash invested is $1,000,000 your cash-on-cash ROI is 12%.

Why ROI Matters In CRE

• Compares Properties - Helps investors choose between multiple opportunities.
• Tracks Performance - Shows whether a property is meeting financial goals.
• Assesses Risk vs. Reward - Higher ROI often comes with higher risk.
• Guides Financing Strategy - Helps decide between paying cash vs. leveraging debt.
  

Conclusion

ROI is one of the most important tools for evaluating potential commercial real estate investments. By calculating NOI, determining your total investment, and applying the ROI formula, you can make more informed decisions and maximize your returns. 

👉 Want help analyzing ROI on commercial properties in Minneapolis?  Click here to connect with our team.

Scott Naasz

Chief Executive Officer | Broker | Owner
North Star Commercial Real Estate Advisors | eXp Commercial