QUOTE (Jack @ Nov 10 2008, 08:52 PM) Hi Denise,I`ll break this down further. Purchase Price: $240,000-Compounded annually by 3% for 6 years: $286, 572.55
Mortgage: $180,000
-Paid down for 6 years with terms of 6% interest & 35 year amortization: $169,083.11
So, 6 years later, when you sell the place, you`re left with the following amount of equity: $286,572.55 - $169,083.11 = $117,489.44
So what`s happened here is that you`ve taken $60,000 and turned it into $117,489.44. And now we see how the "100% return" figure comes about:
-($117,489.44 - $60,000) / $60,000
--95.8%
But wait...
Your investors gave you $60,000 today, and they didn`t see a return for 6 years, meaning that you need to account for time. When you do that, you`re left with a slightly more reasonable rate of return: 11.85%, not adjusted for inflation, taxes, or transaction costs, all of which would bring the ROR down.
Just a piece of advice here - be very careful of offering someone 100% returns in a 5 or 6 year timespan. It`s not realistic. If someone came up to me, with this scenario`s numbers, and told me that I`d be earning a 100% return, I`d tell them that they`d need to have their head examined. Now, maybe I`m completely wrong here, as I`ve never presented to a potential JV partner before, and my real estate portfolio consists of a whopping 2 properties, but what I do understand is finance, and the rate of return on this deal is 11.85%, not 100% (assuming a 6-year hold). Still a respectable yield, but I would think that proper disclosure would be very important to investors, as the 11.85% may not be a sexy enough return on capital for them.
Hi Jack. I`m not totally sure about the financial vocabulary here, but aren`t you two talking about two different things?
Wouldn`t the ROI, the Return on Investment, be roughly 100%. The ROI, as I understand it, just talks about money in and money out, and isn`t compared to time or anything, as it`s just a simple ratio.
Whereas, the ROR, the Rate of Return that you`re talking about, introduces that concept of time. So, both percentages are accurate, but they`re used differently as they measure different things.
Anyway, just my thoughts...
Have a good one, all!
JohnS