Calculating ROI?
Hi Group,
I’m trying to calculate some financials on real estate investment. Please let me know if I’m on the right track.
Sale Price: 80,000
Down: 10,000
Net monthly Profit: 600
Monthly Payment going towards principle: 2,000 Yearly.
What is my ROI?
600 x 12 = 7,200/year
7,200 is 72% of 10,000.
+ 2,000 from Principle
---------------
9,200 is 92% of 10,000.
Does this mean my ROI is 92%
Thanks,
Yes.
But.
Its not at all clear to me that ROI is a very meaningful number in real estate investment in this context.
Generally when people want to calculate ROI its because they want to compare their return to the rate of return of other investments, say the stock market or the CD's at the local bank.
But this is not really a very meaningful comparison for two reasons.
1) it leaves out the value of your labor. If you compare you 92% ROI to the banks CD rate of 3% or whatever it is these days it looks like you are an investing genius. But when the toilet at the bank backs up they don't call you just because you have a CD there. But your tenants do. So some part of that $9,200 is the result not of your capital but the result of your labor. In other words, comparisions of ROI between active and passive investments is misleading.
2) It ignores the fact that you have a great deal more capital at risk in the deal than the downpayment. Assuming that you signed personally on that mortgage you don't just have $10,000 at risk. If the property looses its value then the bank is chasing you for their $70,000 as well. For this reason I prefer to look at Return on Capital (in your example 11.5%) rather than Return on Invesment. This makes it possible to compare transactions which have different debt structure to see if the underlying deals are better or worse than each other.
see my real estate investment calculator here:
http://web.peoriadesignweb.com/home/calculator/comparison.shtml
Let me know if it helps you or not . Also appreciate any feedback on bugs or enhancements.
Hey,
You are going to MAKE (Net Profit) $600 per month on an $80k house??? Are you sure you did your number correctly?
If you are looking at cash on cash return as ROI, then you need to determine your NET cash flow.
Net cash flow is the amount of money left over each month after all your expenses are paid to include your mortgage.
Divide your Annual Net Cash Flow by your initial down payment (and settlement costs paid at closing if any), then multiply by 100% to get your cash on cash return.
Hey Group,
These numbers are not real. They were constructed for the purposes of the example.
However, there's a good flow of helpful information.
Thanks,
Angel