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Editor: Shaun Callacher
How To Work Out Return On Investment
Want to be a successful investor? - you should know what Return On Investment (ROI) is!
Return on investment is a great and simple way to measure how quickly you can get all of your input money back from any potential investment, including property. The higher the Return On Investment, the better. To be more successful in investing you want to find deals that not only pay you your initial money back quickly but also pays you more.
If you are serious about property investing, I suggest it's wise to get use to working out your return on investment on every opportunity you see. You will then be able to spot a great deal when you find it, and act quickly to close it.
The formula to work out ROI from property rental income is this:
Net Rental Income / Your Own Money In The Deal x 100 = ROI %
The higher the percentage, the quicker your money is returned and the better the investment. For example, if you get a 10% ROI, it would take 10 years to get you all money back. If you get a 25% ROI it will take you 4 years.
My personal rule of thumb for investing in property using strategies such as lease's and lease options, is to have a minimum annual ROI of 100%. So in other words, I want to get all of my OWN money back within the very first year from the NET rental profit.
Using traditional purchasing methods, I leverage bank lending to get my own invested money back as quickly as possible. I aim to get ALL of my money back within the first year through either mortgaging, remortgaging or the rental income. I total up all the predicted money that will come back to myself through one of those ways, and the formula to then work out your annual ROI is this:
(Total Money Back From Leveraging Bank Lending & Net Rental Income) / Your Own Money In The Deal x 100 = ROI%
If you purchase a property and can re-finance all of your own money out within the first year, your ROI from the rental income afterwards is infinite!
In both case's I aim to have an asset that is producing an infinite return after the first year. The return after the first year will be from monthly rental cash flow and capital growth.
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