ROI formula
- Thread starter CDM
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QUOTE (CDM @ Dec 13 2009, 09:09 AM)
Hi,
What is the formula to calculate the % of return on a realestate investment?
TIA
similar ROI question: http://myreinspace.com/search/public_forums/General_Discussion/61-14608-73703-return_on_investment_question.html#73703
Hi,
What is the formula to calculate the % of return on a realestate investment?
TIA
similar ROI question: http://myreinspace.com/search/public_forums/General_Discussion/61-14608-73703-return_on_investment_question.html#73703
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I`ve been using:
annual rent/investment amount*100
or:
annual cash flow/investment amount*100
By investment amount I include only my own investment, not the bank`s. So, for instance, if I put 20% down on a $300 000 house my investment is $60 000.
If annual rent is $1800/month * 12 = 21600, my ROI would be:
21600/60000*100 = 36%
If my annual cash flow is 400 * 12 = 4800 then my true ROI is
4800/60000*100 = 8%
This tells me whether or not my $60000 is working harder for me invested in property or in the bank at ~2.5%.
I also find this useful in comparing properties of differing values. Am I better to make 2 small investments averaging 9.3% for which I would have to put up 2 x $30000, or one larger investment for which I would put down $60000 to achieve a ROI of 8.2%? I find this really simplifies the comparison.
annual rent/investment amount*100
or:
annual cash flow/investment amount*100
By investment amount I include only my own investment, not the bank`s. So, for instance, if I put 20% down on a $300 000 house my investment is $60 000.
If annual rent is $1800/month * 12 = 21600, my ROI would be:
21600/60000*100 = 36%
If my annual cash flow is 400 * 12 = 4800 then my true ROI is
4800/60000*100 = 8%
This tells me whether or not my $60000 is working harder for me invested in property or in the bank at ~2.5%.
I also find this useful in comparing properties of differing values. Am I better to make 2 small investments averaging 9.3% for which I would have to put up 2 x $30000, or one larger investment for which I would put down $60000 to achieve a ROI of 8.2%? I find this really simplifies the comparison.
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QUOTE (JessHunt @ Dec 13 2009, 06:33 PM) ...
If my annual cash flow is 400 * 12 = 4800 then my true ROI is
4800/60000*100 = 8%..
let`s not forget expenses that do not show up annually i.e. a new roof, a realtor or legal fee on sale or a new hot water tank .. PLUS appreciation that is likely over an extended period of time.
If my annual cash flow is 400 * 12 = 4800 then my true ROI is
4800/60000*100 = 8%..
let`s not forget expenses that do not show up annually i.e. a new roof, a realtor or legal fee on sale or a new hot water tank .. PLUS appreciation that is likely over an extended period of time.
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QUOTE (JessHunt @ Dec 13 2009, 06:33 PM) I`ve been using:
annual rent/investment amount*100
or:
annual cash flow/investment amount*100
By investment amount I include only my own investment, not the bank`s. So, for instance, if I put 20% down on a $300 000 house my investment is $60 000.
If annual rent is $1800/month * 12 = 21600, my ROI would be:
21600/60000*100 = 36%
If my annual cash flow is 400 * 12 = 4800 then my true ROI is
4800/60000*100 = 8%
This tells me whether or not my $60000 is working harder for me invested in property or in the bank at ~2.5%.
I also find this useful in comparing properties of differing values. Am I better to make 2 small investments averaging 9.3% for which I would have to put up 2 x $30000, or one larger investment for which I would put down $60000 to achieve a ROI of 8.2%? I find this really simplifies the comparison.
There are different ratios to determine whether your investment may be attractive.
First is the rental yield: Gross annual rent/pruchase price - for REIN it should be around 8%
Second Cap Rate: Net Rent (excluding financing costs)/Purchase price - some of my properties make 6% which makes me happy, many in Calgary are 3% or less which is not very good as it will likely create negative cashflow when financing costs have to be paid. When your cap rate is higher than your mortgage interest rate you`ll enhance your positive cashflow even when using a high LTV. However, when using a high LTV stress testing at higher interest rates is essential.
Your return on investment (ROI) is the sum of annual appreciation plus cashflow plus principal paid back on mortgage divided by the cash you invested, i.e. your downpayment plus other acquisition costs. Typically, your ROI should be equal or better than 10%. This number also depends on the pain factor and risk your taking. E.g. high leverage, property in small town with poor job market vs a large affluent city, etc.
Hope this helps.
annual rent/investment amount*100
or:
annual cash flow/investment amount*100
By investment amount I include only my own investment, not the bank`s. So, for instance, if I put 20% down on a $300 000 house my investment is $60 000.
If annual rent is $1800/month * 12 = 21600, my ROI would be:
21600/60000*100 = 36%
If my annual cash flow is 400 * 12 = 4800 then my true ROI is
4800/60000*100 = 8%
This tells me whether or not my $60000 is working harder for me invested in property or in the bank at ~2.5%.
I also find this useful in comparing properties of differing values. Am I better to make 2 small investments averaging 9.3% for which I would have to put up 2 x $30000, or one larger investment for which I would put down $60000 to achieve a ROI of 8.2%? I find this really simplifies the comparison.
There are different ratios to determine whether your investment may be attractive.
First is the rental yield: Gross annual rent/pruchase price - for REIN it should be around 8%
Second Cap Rate: Net Rent (excluding financing costs)/Purchase price - some of my properties make 6% which makes me happy, many in Calgary are 3% or less which is not very good as it will likely create negative cashflow when financing costs have to be paid. When your cap rate is higher than your mortgage interest rate you`ll enhance your positive cashflow even when using a high LTV. However, when using a high LTV stress testing at higher interest rates is essential.
Your return on investment (ROI) is the sum of annual appreciation plus cashflow plus principal paid back on mortgage divided by the cash you invested, i.e. your downpayment plus other acquisition costs. Typically, your ROI should be equal or better than 10%. This number also depends on the pain factor and risk your taking. E.g. high leverage, property in small town with poor job market vs a large affluent city, etc.
Hope this helps.
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QUOTE (gusser @ Dec 14 2009, 09:47 AM) There are different ratios to determine whether your investment may be attractive.
Your return on investment (ROI) is the sum of annual appreciation plus cash flow plus principal paid back on mortgage divided by the cash you invested, i.e. your down payment plus other acquisition costs. Typically, your ROI should be equal or better than 10%. This number also depends on the pain factor and risk your taking. E.g. high leverage, property in small town with poor job market vs a large affluent city, etc.
Hope this helps.
The inclusion of annual appreciation and principal pay down should only be included in calculating ROI at time of sale of property.
Annual ROI while holding property should not include these numbers as they are pure speculation based on reading the future.
Although it is expected a investor will sell a property for more than they have invested through down payment and monthly principal payments there is no guarantee of that or of appreciation.
One may only speculate on the future and on future ROI.
Your return on investment (ROI) is the sum of annual appreciation plus cash flow plus principal paid back on mortgage divided by the cash you invested, i.e. your down payment plus other acquisition costs. Typically, your ROI should be equal or better than 10%. This number also depends on the pain factor and risk your taking. E.g. high leverage, property in small town with poor job market vs a large affluent city, etc.
Hope this helps.
The inclusion of annual appreciation and principal pay down should only be included in calculating ROI at time of sale of property.
Annual ROI while holding property should not include these numbers as they are pure speculation based on reading the future.
Although it is expected a investor will sell a property for more than they have invested through down payment and monthly principal payments there is no guarantee of that or of appreciation.
One may only speculate on the future and on future ROI.
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QUOTE (invst4profit @ Dec 14 2009, 09:24 AM)
..
Although it is expected a investor will sell a property for more than they have invested through down payment and monthly principal payments there is no guarantee of that or of appreciation.
One may only speculate on the future and on future ROI.
Of course any future appreciation is speculative.
However, unless you buy levered commercial real estate, it does usually not make sense to buy real estate in flat or declining markets.
See here on why equity gain not the only way to make money in RE: http://myreinspace.com/public_forums/Real_Estate_Discussion/62-10711-Equity_is_not_the_only_way_to_make_money_in_real_estate.html
You can, after perhaps a few years, show approximate values, detailed mortgage paydown and thus, approximate returns if sold today.
..
Although it is expected a investor will sell a property for more than they have invested through down payment and monthly principal payments there is no guarantee of that or of appreciation.
One may only speculate on the future and on future ROI.
Of course any future appreciation is speculative.
However, unless you buy levered commercial real estate, it does usually not make sense to buy real estate in flat or declining markets.
See here on why equity gain not the only way to make money in RE: http://myreinspace.com/public_forums/Real_Estate_Discussion/62-10711-Equity_is_not_the_only_way_to_make_money_in_real_estate.html
You can, after perhaps a few years, show approximate values, detailed mortgage paydown and thus, approximate returns if sold today.
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One can always approximate returns but that is all they can ever be until time of sale.
Although it is difficult to accept it is not uncommon for investors to lose money.
Some buy too high, sell in recessions, forced quick sales for personal reasons, tenant damage etc.
The reasons which may result in losing equity in a income investment property are endless, rarely expected, never planed.
Approximating returns based on speculation are most useful when calculated for the purpose of a sales pitch. Beyond that they do not serve much purpose.
Except maybe for that warm fuzzy feeling investors gets from visualizing sugar plum profits.
Although it is difficult to accept it is not uncommon for investors to lose money.
Some buy too high, sell in recessions, forced quick sales for personal reasons, tenant damage etc.
The reasons which may result in losing equity in a income investment property are endless, rarely expected, never planed.
Approximating returns based on speculation are most useful when calculated for the purpose of a sales pitch. Beyond that they do not serve much purpose.
Except maybe for that warm fuzzy feeling investors gets from visualizing sugar plum profits.
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When I starting reading this post my first thought was..I wonder if invest4profit was going to post about this. And there you go. Don`t get me wrong, I enjoy your point of view. You also bring up a good point. Is this for your own purposes or is this to sell top potential JVPs? What is the purpose of finding the ROI? If this is for JV sales, then you would need to enter future appreciation (hopefully based on past statistics) into the equation.
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QUOTE (CDM @ Dec 13 2009, 09:09 AM)
Hi,
What is the formula to calculate the % of return on a realestate investment?
TIA
Back to the question at hand....why isn't this a simple formula? Estimated money returned divided by estimated money in. IE return $100,000 in 5 years divided by $ initial investment $50,000 equals 200% ROI.
Yes you can start getting complicated by factoring in time etc but for the guy pitching his first deal why not just keep it stupid simple. And I would argue for this even if you are pitching your 100th deal.....the masses are not bright so keep it simple!!! A confused mind says "no" so don't confuse them!!
Hi,
What is the formula to calculate the % of return on a realestate investment?
TIA
Back to the question at hand....why isn't this a simple formula? Estimated money returned divided by estimated money in. IE return $100,000 in 5 years divided by $ initial investment $50,000 equals 200% ROI.
Yes you can start getting complicated by factoring in time etc but for the guy pitching his first deal why not just keep it stupid simple. And I would argue for this even if you are pitching your 100th deal.....the masses are not bright so keep it simple!!! A confused mind says "no" so don't confuse them!!
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QUOTE (wgraham @ Dec 14 2009, 01:35 PM) Back to the question at hand....why isn`t this a simple formula? Estimated money returned divided by estimated money in. IE return $100,000 in 5 years divided by $ initial investment $50,000 equals 200% ROI.
Yes you can start getting complicated by factoring in time etc but for the guy pitching his first deal why not just keep it stupid simple. And I would argue for this even if you are pitching your 100th deal.....the masses are not bright so keep it simple!!! A confused mind says "no" so don`t confuse them!!
Fair enough but how do you calculate "Estimated money returned"?
Yes you can start getting complicated by factoring in time etc but for the guy pitching his first deal why not just keep it stupid simple. And I would argue for this even if you are pitching your 100th deal.....the masses are not bright so keep it simple!!! A confused mind says "no" so don`t confuse them!!
Fair enough but how do you calculate "Estimated money returned"?
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QUOTE (vandriani @ Dec 14 2009, 02:45 PM) Fair enough but how do you calculate "Estimated money returned"?
Cash flow + mortgage paydown + apprecition = money returned. At some point in time you have to make your best guess and everyone will argue about your assumptions but that doesn`t change the formula. If you have a five year crystal ball that can remove assumptions this is a sharing kind of community
Cash flow + mortgage paydown + apprecition = money returned. At some point in time you have to make your best guess and everyone will argue about your assumptions but that doesn`t change the formula. If you have a five year crystal ball that can remove assumptions this is a sharing kind of community
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QUOTE (invst4profit @ Dec 14 2009, 09:24 AM) The inclusion of annual appreciation and principal pay down should only be included in calculating ROI at time of sale of property.
Annual ROI while holding property should not include these numbers as they are pure speculation based on reading the future.
Although it is expected a investor will sell a property for more than they have invested through down payment and monthly principal payments there is no guarantee of that or of appreciation.
One may only speculate on the future and on future ROI.
Anyone making an investment is trying to estimate what a reasonable return on investment may be. So an expected rate of return on investment maybe expressed as ROI. For me, without leverage, I would like a return of 4% in terms of cash flow and mortgage principal reduction plus an annual appreciation of 6%. Total anticipated return on investment is 10%. If you use leverage this anticipated ROI maybe optimized depending on the investor`s risk tolerance.
You could also look at your ROI based on historical data where you would use past market appreciation (which was for Calgary 6% during the previous for decades or so) plus actual cashflow and mortgage reduction (divided by monies invested).
So an ROI is not speculative it is just a ratio that expresses investment performance - past or future. Forecasting an ROI is not necessarily speculation either because who would make an investment without trying to set a benchmark to measure performance. So I don`t aree with invest4profits earlier opinion that using an ROI is speculative. But then that is what this forum is all about - expressing opnions and having a good debate.
Annual ROI while holding property should not include these numbers as they are pure speculation based on reading the future.
Although it is expected a investor will sell a property for more than they have invested through down payment and monthly principal payments there is no guarantee of that or of appreciation.
One may only speculate on the future and on future ROI.
Anyone making an investment is trying to estimate what a reasonable return on investment may be. So an expected rate of return on investment maybe expressed as ROI. For me, without leverage, I would like a return of 4% in terms of cash flow and mortgage principal reduction plus an annual appreciation of 6%. Total anticipated return on investment is 10%. If you use leverage this anticipated ROI maybe optimized depending on the investor`s risk tolerance.
You could also look at your ROI based on historical data where you would use past market appreciation (which was for Calgary 6% during the previous for decades or so) plus actual cashflow and mortgage reduction (divided by monies invested).
So an ROI is not speculative it is just a ratio that expresses investment performance - past or future. Forecasting an ROI is not necessarily speculation either because who would make an investment without trying to set a benchmark to measure performance. So I don`t aree with invest4profits earlier opinion that using an ROI is speculative. But then that is what this forum is all about - expressing opnions and having a good debate.