What do you include in your ROI calculations?

[Ryan Stahr]

I'm still running numbers on properties I can access via the MLS and a friend who is a realtor, just for practice. I then had my roommate look at my spreadsheets because he is a numbers guy and likes to play devil's advocate.

My question is: when you are calculating the cash-on-cash returns calculating your yearly ROI, what numbers do you use? for example, do you take every minute real estate closing cost and fee and account for them in your yearly profit calculations? Because after year 1, those expenses will not recur and your profit margin will go up. it's obviously good to know so you have all the capital prepared for closing and I want to be prepared to spend more than I expect.

but what exactly do you include in your assessments of ROI and yearly profits?

[Tom Goans]

@Ryan Stahr,

This old investor does not agree with most of the "numbers" methods used and embraced by many on this blog. This includes the questions you have asked.

My analysis methods are far more complex and inclusive. Keep in mind, you may have borrowed the purchase and renovation money, but you are still 100 percent responsible for repaying the loan(s). This should be part of the investment analysis that is many times ignored by “investors/wholesalers/flippers”. This goes beyond the loan payments consideration.

Some members accept returns and cash flow far too low for the investment to survive any challenges without becoming a money pit - thus the investment turns into a liability and a draw on the balance of the investment portfolio or other sources of cash flow. This is mostly the reason why so many “investors” go broke during the common real estate market down cycles. The same reason also explains why so many “investors” were considered large contributors to the last market down cycle that spread beyond real estate and affected the financial markets as well.

Nevertheless, I will share my opinion of one huge mistake many of the “investors/wholesalers/flippers” make when conducting investment analysis:

• The omission of personal time and personal expenses. Personal expenses can include equipment and other hard costs.
• Time is money. Not once have I seen in an analysis the accounting for the costs of screening tenants or buyers. Just placing ads, responding to prospects, and reviewing applications should be considered a cost. What about all the time driving around, showing properties, inspections, research, etc. Just because you are busy does not mean you are productive.

You are unique and so are your present status and goals. What works for one person may not work for another. Beware of using others’ acceptable reward (return) determination. It may be wiser for you to determine your own risk and workload vs. the reward (return) that is acceptable to you to meet your goals and family needs.