All Topics / Help Needed! / What is and how do you calculate ROI?

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• Michael and Loretta
Member
@michael-and-loretta
Join Date: 2008
Post Count: 19

Hi again.

Yep another question.

As above, can anybody help explain how ROI works and what it really means?

Many thanks,

Michael and Loretta

trajik
Member
@trajik
Join Date: 2005
Post Count: 102

ROI = Return on Investment, expressed as a percentage.

For example, if you invest \$100,000 and it earns \$8,000 per annum, then the ROI is 8%.

Now, there will be differences in whether or not you are using just the amount that you invest, or the cost of the overall investment, ie; if you borrow, then your investment is less than the cost of the investment.  Also, whether or not you are using cash return, pre-tax return or after-tax return.   The combination of figures will give signficantly different answers.   So be sure that you are consistent in what you're using to measure and compare investment returns.

Hope this helps.

Ross

Michael and Loretta
Member
@michael-and-loretta
Join Date: 2008
Post Count: 19

It does, Ross. thank you.

But it only then raises more questions.

Which is the best to use then? What you invest in the property yourself or the whole value of the property?

Also what do you mean by "cash return"?

Thanks

Michael and Loretta

Steve McKnight
Keymaster
@stevemcknight
Join Date: 2001
Post Count: 1,763

Hi,

ROI is popular among accountants, but I feel it is less useful for property as it does not fully price in borrowing capacity.

For example, let's look at this example:

Purchase price \$200k
Cash deposit: 20%
Closing costs: \$5% of purchase price; paid in cash
Annual rent: \$12,000
Annual cash costs: \$15,200 (includes \$2,000 of capital loan repayments)
Depreciation: \$1,500

The ROI would be:

Rent: \$12,000
– Cash costs: \$15,200
+ Capital loan pmts: \$2,000
– Depreciation: \$1,500
= Loss: \$2,700

Cost: \$200,000
+ Closing costs: \$10,000
=Total cost: \$210,000

ROI= -2,700 / 210,000
ROI = -1.29%

However, a cash-on-cash return would be:

Rent: 12,000
– Cash costs: \$15,200
= Cash loss: \$3,200

Deposit Paid: \$40,000
+ Closing costs: \$10,000
= Cash Down: \$50,000

CoCR= -3,200 / 50,000
CoCR= -6.4%

Do you see how ROI uses asset value (not taking into account % of cost borrowed), whereas CoCR does factor in the amount of cash contributed?

Having said that, if you contribute low cash then the CoCR can be skewed.

As I said, I prefer CoCR for property deals, particularly positive cashflow calcs.

If you have trouble crunching numbers then get along to the upcoming conference. There will be plenty of help on offer.

Cheers,

Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.com

Success comes from doing things differently

Michael and Loretta
Member
@michael-and-loretta
Join Date: 2008
Post Count: 19

Thanks for those details, Steve.

There are some things I was not aware of – CoCR.