Calculate Return On Investment

Let’s talk about M-O-N-E-Y!

To do that, we need to calculate return on investment. We need to understand the numbers.

Analyzing the numbers is the GOLDEN process that determines whether the investment will help you reach or exceed your investment goals.

You should never buy a property without knowing how much you could make, how you are going to buy it, and how you will sell it. That is the single most important secret to real estate investing success. So let’s repeat it . . .

The due diligence in the property analysis process is what separates the real estate triumphs from the failures. A mistake in calculations can cost thousands of dollars and many sleepless nights or cost a missed opportunity to a great investment deal.

From our research, we have found that in 2009, 85% of all real estate investors buy negative cash flowing properties. What information is the majority of investors missing?

Let me put you in the top of all investors. Here is the crucial piece of the puzzle: NOT everyone uses the same factors to calculate. Therefore, not every calculation is correct.

Allow me to show you how destructive an inaccurate calculation can be to your investment profitability.

Let’s learn about the different incomes in an investment property, how many ways investors can make a particular calculation mistake, and how I can help you avoid all of these mistakes.

• Net Operation Income (NOI) – the most critical calculation because most of all other analysis factors will depend on this number. Yet, this is the #1 most missed calculation.
• Cash Flow– this is the monthly income you will receive from your rental payments after all expenses are paid. But there are two different types of cash flow: cash flow before taxes and cash flow after taxes. After taxed cash flow is your pocket money! Can you guess the #1 mistake in this calculation? Yes, you are correct – using the wrong cash flow.
• Total Out of Pocket Fund– how will you buy an investment property? Will you take on a loan or pay all cash? Which strategy will give you the maximum return on investment?
• Capitalization Rate (Cap rate) – this number will allow you to estimate how much the property is valued at based on the current financial performance of the property as compared to other similar properties in the area. Knowing this number will give you a benchmark on how much you should offer. You might be surprised to know that there are at least 25 different ways to calculate cap rate . . . and only one is correct!
• Cash on Cash Return – also known as return on investment. Every investor should compare the return on investment of each investment type (stocks, annuities, real estate, etc.) The biggest challenge is how to accurately compare across investment types.
• Payback period (or Return-of-Investment) – the time in which all of your initial cash investment is paid back to you and now, your return on investment is infinite! Yes, infinite return on investment – it only happens with real estate.
• Debt Service Coverage Ratio (DSCR) – the ratio in which lenders determine how risky an investment is.
• Global Debt To Income (GDTI) – the benchmark in which lenders determine how risky an investor is.