What is and how do you calculate ROI?

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

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,