QUOTE (afshinrein @ Oct 27 2010, 03:06 AM) Hello,
If I am collecting $1000/month rent ($12000/year) and put $0.00 capital because I use home equity loan, then what is my net ROI
(my $12000/year rent - my investment cost of $3000/year)/$0 ??? my cost includes tax and HEL interest as well.
Afshin
I`m not sure what your ROI equation is representing:
(Yearly rent collected-yearly cost of borrowing form HELOC) / $0(capital invested)
As stated, any time "capital invested" is $0 your return is "infinite". This is not only, "not realistic" but it is useless to you as an investor. Remember ROI is an analysis tool you use to gauge the potential performance of an investment before you make it and actual performance after completed. Usually you are looking for a min. return value or comparison between two different investments to determine if the reward is worth risk to proceed. Your analysis is only as good as the estimates and assumptions you make and need to be as accurate as possible to make an informed decision.
Let`s stick with the traditional ROI equation and cash on cash equation:
(Total profit after sale- total capital invested) / Total capital invested
Annual cash flow (usually fist year before taxes) / Total capital invested
Based on your assumption of $3000/yr borrowing cost and a 5 yr hold one could assume your total capital invested is $15000. Let assume the property cash flows $100 per month and when you sell your receive $30000 profit after closing. The return would be as follows:
ROI = (30000-15000)/15000 = 100% or 20%/yr over 5 yrs
Cash on Cash = (1200)/15000 = 8%
This is based on $3000/yr borrowing cost is the only capital you invest. Weather that is realistic or not is the question you need to ask yourself and highly depends on your expected profit and cash flow being accurate.
Personally if using an HELOC to invest I would ensure the cost of borrowing is covered by the cash flow from the property. This way your tenant pays the interest and your cost is truly $0. That being said, I do not consider a HELOC to be free money. It is equity in my personal residence and when investing it, I treat it as capital invested out of pocket. Therefore my "total capital invested" is the total amount "borrowed" from my HELOC and my analysis is done with that figure.
Side note: If you do want to consider this $0 capital invested then if fact you do not have an ROI at all but rather money earned for time spent. So a $30000 profit could represent $6000 / yr or $100 / hr, depending on how much time/effort was put into the investment.