All Topics / Help Needed! / ROI Formula clarification

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  • Profile photo of wblackwblack
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    @wblack
    Join Date: 2010
    Post Count: 34
    November 2, 2010 - 12:55 am

    Hi all, looking for some clarification on the Return On Investment (ROI) formula. Is the purchase price in thre formula the price final sales price, or the amount borrows (eg final sale price less any cash desposit).
    Thanks in advance. WB

    Profile photo of thomsonthomson
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    @thomson
    Join Date: 2010
    Post Count: 31
    November 3, 2010 - 6:26 am

    Hi WB,

    I think the answer to your question is simply which one do you want the answer for?  Do you want to measure the performance of the property as an asset or the profit you've made after purchase costs such as deposit and finance etc?

    I personally would use the formula here http://www.investopedia.com/terms/r/returnoninvestment.asp and use the final sales price.  The ROI for the asset (house) in this case then doesn't matter if you borrow to buy it or buy it outright in cash.

    If you want to measure the ROI in the second sense, then in the formula use the costs (deposit, legal etc.) rather than the sales price of the asset.

    Please bear in mind that I'm a total newbie, but that's my opinion for what it's worth

    thommo

    Profile photo of wblackwblack
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    @wblack
    Join Date: 2010
    Post Count: 34
    November 3, 2010 - 6:43 am

    Thanks Thommo, really do appreciate the reply, but I'm thinking maybe it does show that this might all be a bit over my head, as that only confuses me twice as much and I have no idea what all the figures actually mean, or what figures to put where. My question probably wasn't structured quite right in the first place either, but thanks anyway, we'll soldier on with caution and see where we land.

    Profile photo of thomsonthomson
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    @thomson
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    Post Count: 31
    November 3, 2010 - 7:07 am

    No worries. 

    I have read both of Ron Forlee's books on property development which I thought were quite good, maybe they would help.

    Here's how I see it working in an example:

    Buy house for 200K (sales price).  After 1 year (or any amount of time) the value is now 300K so there has been a capital gain of 100K.  If you divide 100K profit by the original purchase price of 200K (100/200 = 0.5) you get 0.5 which as a percentage is 50%. 
    Therefore your ROI is 50%, which I reckon is pretty good :)

    I'm sure there's some clever property investment way of using the formula but that's essentially it I think.

    thommo

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