At the time of invest in real estate projects, intuition can fail and your profitability can be affected. Therefore, you need concrete data to tell you if the project is really going to bear fruit. This is where two key allies come into play: the ROI And the TIR (also known as IRR). These financial metrics are essential because they allow you to compare different properties, get an idea of future earnings and reduce risks of real estate investments. Using them well is what separates an investment that makes you money from one that barely leaves you with a table.
What is ROI in the real estate world
Think about the ROI (Return on Investment) as your first thermometer to know How profitable is a real estate business. It's a direct calculation that tells you, in a percentage, How much money does an investment return to you in relation to what you put in. In a nutshell, measure the profit you made versus what you invested.
In the real estate sector, ROI usually shows the percentage of net profit generated by a property per year on the total amount of money you have invested in it.
How is ROI calculated on a property
The formula is very simple:
ROI = (Annual Net Profit/Total Investment) × 100
BenefitAnnual net: what you have left after subtracting expenses (such as IBI, community, insurance and repairs) from rental income.- Total investment: the price of the house, plus the purchase costs (taxes, notary), the renovations and what you spend on furnishing it.
A practical example to better understand
Imagine that you bought an apartment for 200,000€ and you put 30,000€ into arrangements and decoration, so the total investment was 230,000€. If with the rent you get 12,000€ net per year, the calculation is as follows:
12,000/230,000×100=5.22
That 5.22% is the annual ROI of that investment.
The good and the bad of ROI
The ROI is great because it's easy to understand and to calculate, ideal for quickly comparing several properties. However, it has an important “but”: it doesn't take into account how the value of money changes over time or changes in income. That's why it works best for simple, short-term investments, and not so much for more complex or long-term projects.
What is the IRR (Internal Rate of Return)?
La TIR is the rate of return that makes the present value of all future revenues of a project equal to the initial investment. Put more simply, it tells you What is the real return you will achieve if you maintain the investment throughout its life cycle. It is a fundamental metric because it incorporates the concept of “time value of money”.
The formula and how is IRR calculated
To find the IRR, you have to solve a slightly more complex equation, which is based on VAN (Net Present Value):
VAN = -Initial investment + Σ [Cash flow/(1 + IRR) ^t] = 0
Where:
- VAN is the Net Present Value.
- T represents each of the years or periods.
- Cash flows are the net income generated by the property each year.
Calculating this by hand is complicated, so the most common is to use tools such as Excel or Google Sheets, which have specific functions for this purpose.
A practical example with a real estate project
Imagine that you invest 150,000€ on a project and, over five years, you earn the following net income:
- Year 1: 35,000€
- Year 2: 55,000€
- Year 3: 47,000€
- Year 4: 50,000€
- Year 5: 49,000€
By applying the formula, the TIR of this project would be of 16.57%. This means that, considering the passage of time and how the value of money changes, this investment offers you an annual return of 16.57%.
Key Differences Between ROI and IRR
The main difference is that the ROI It gives you one quick and static vision of profitability, like a picture of the moment. On the other hand, the TIR It offers you a dynamic and long-term analysis, like a film of profitability over time.
ROI is perfect for instantly comparing properties, but IRR is much more accurate and reliable when you have variable income, possible reinvestments or are looking to analyze future capital gain. In short, if the ROI is the tip of the iceberg, the TIR shows you the part that is underwater.
When to use ROI or TIR
The truth is that you don't have to choose between ROI And the TIR, because everyone is useful in their own scenario. ROI gives you a quick answer, perfect for when you need a general and uncomplicated idea. On the other hand, the TIR offers you a deeper and more complete vision, ideal for understanding the project in its entirety over time. Knowing when to use each one helps you avoid serious errors when making decisions. 🎯
ROI for short-term investments
El ROI is your best friend when you are looking for simplicity. It is ideal for analyzing property purchases that you are going to rent immediately or when you want to compare several options without getting lost in complex calculations. It's that “one glance” metric that tells you if the investment looks good from the start.
IRR for long projects and variable cash flows
When revenues are going to change over time or the project is extended over several years, the TIR is indispensable. Think of it in cases such as housing development, the rehabilitation of an old building or when you expect significant capital gain when selling. In these situations, the time factor and the variation in income are key, and the IRR captures this perfectly.
The key is to use them together
The best strategy is not to choose between one or the other, but Combine them. El ROI can give you that first quick look to see if it's worth further research. If the answer is yes, the TIR comes into play to confirm if that investment remains attractive over a longer horizon. A dual focus gives you a much fuller and safer image.
Common Mistakes to Avoid
Even the most experienced investors miss details when calculating these metrics. Here are some of the most common mistakes so you don't fall into them:
- Confusing net return with ROI: Often, people forget to subtract crucial expenses such as taxes, community or maintenance, which completely distorts the real result.
- Skip “hidden” expenses: Things like notary fees, property registration, insurance or, worse, periods when the property is empty (vacant) have a direct impact on profitability, and not including them is a serious mistake.
- Interpret the IRR without considering the risks: A very high IRR is not always synonymous with a safe project. Sometimes, it can be an indication that the projected cash flows are too optimistic and that in reality they will not be met. Remember that a high number can hide a high level of risk.
In real estate investment platforms such as Reental we use metrics such as ROI And the TIR to analyze each project in detail before offering it to our community. These tools allow us to select only those investments that combine security, profitability and revaluation potential, ensuring that our investors have access to solid and transparent opportunities within the global real estate market.
If you want to continue learning about real estate investment, we recommend the following articles
- The best cities in Spain to invest in housing (updated 2025)
- Real estate investment tax in Spain 2025: practical guide
- Risks in real estate investment: rent, squats and delinquencies, how to minimize risks
- How to invest in real estate in Spain with little money
- What is a good real estate investment?
- How is the net return on a rental calculated
