How To Calculate ROI

Comments(6)

• 
  learntherules6th September, 2004

  I know I'm not the only one w/the question....it took some surfing, but I found a link w/an example. Not sure if I can post links but here goes
  
  ROI calculation
  http://www.****This URL Not allowed****.com/money-ideas/mm-028.html
  
  I also use the mortgage calulator on www.interest.com

• 
  commercialking6th September, 2004

  I think Return on Investment is a very misleading statistic.
  
  That said here's how you calculate it.
  
  First you determine your projected operating income before debt. Simple
  
  Rent Roll Minus vacancy and deliquencies minus all operating expenses (including property taxes but not income taxes). = Net before debt
  
  Next you subtract your debt service/mortgage payment.
  
  This leaves you with net after debt.
  
  Divide the Net after debt by the Downpayment and this is equal to Return on Investment. as a percentage.
  
  The problem with ROI as analysis tool is that it depends heavily on how much you put down. So in a no-money-down deal the ROI is infinite. but this forgets that all that extra leverage brings with it additional risk.
  
  I believe a better tool for comparison of buildings is the Capitalization rate.
  
  Step one is the same, determine Net Before Debt.
  
  Step two, divide NBD by the asking price ( or the current asking price in a negotation) this allows you to compare buildings without reference to the various debt structures available.

• 
  hibby7613th September, 2004

  commercialking is right on.

• 
  learntherules14th September, 2004

  Thanks. I will use the above.

• 
  learntherules23rd October, 2004

  ok, I took the info above & I am applying it. Sometimes I think these deals are too big for me, but maybe not.
  
  Ask $2.2mil ($1.4mil current mtg)
  - growing area w/25 room townhouses around, 11 units (renovated & rented)
  - NOI (per seller) 186,300
  - Adjusted NOI 163,770
  I incorporated 5% vacancy, 5% conting
  
  Cap 7.44
  COC 9.39
  assumes 30% down, 8%, 30 yr amort
  
  I think this is a good deal because I calculated the above based on the ask, so my #'s will improve with a lower offer. Have collateral & cash for down. What would you do re: the above?
  
  Other scenarios involve gut renovations, etc. & I'm not sure my partner has enough time to do all this rehab work in the time we need it done.

• 
  Galahad21st November, 2004

  Hey folks. New to the forum... but this is how I look at it...
  
  ROI is a very misconstrued function, it can be interpreted on a lot of levels.
  
  At the most basic
  
  1) You can look at total property purchase price versus cash flow, IE, as if you had bought for 100 percent cash.
  
  2) You can calculate ROI based on cash in (actual cash investment) weighed against net cash flow (after debt), the idea of leverage 100 = infinite ROI.
  
  Aside from those basic calculations, you can then factor in what other return will factor in... for example, here are some things you may factor in...
  
  -Management fee (if you deduct that from your costing since it goes to you anyway)
  -Superintendent costs (if you feel you can do some/all of it yourself
  -Actual operating costs versus P&L costs. For example, if you can reduce costs of maintenance by 20% because you KNOW that they're overspending, then you can factor that in.
  
  Aside from all that, you should consider factoring in ROI adjustments for future conditions. Some examples of these would be...
  
  -Factoring in ongoing vacancy and tenant turnover
  -Rising interest rates (if you project out a number of years based on macro trends)
  -Capital value appreciation (equity)
  -Principal paydown (equity)
  -Potential upside revenue you think you can produce through new fees/etc.
  -Potential tax savings if you can corporatize certain your current income/expenses
  
  This is just a partial list. Not sure if that helps. Really, when you look at the total potential ROI of an investment over an entire amortization period, there's alot of room for upside and downside
  
  Galahad