RETURN ON INVESTMENT

[Alex Hively]

Hello,

I was wondering if everyone here can check my work. I am trying to figure out how leverage can magnify my returns by using various amounts of down payments: specifically $100,000 ( an all cash purchase), $50,000, $25,000, and $10,000.

    Example 1: $100,000 all cash purchase

ROI (return on investment) = income (NOI) / cash investment

                                                     = $10,000 /  $100,000

                                                     = 10%

 -  I understand that in the real world that I wouldn't pocket the entire 10 k and portions of it would go to Vacancy and Operating Expenses such as insurance, repairs, maintenance and property taxes.

If I finance part of the purchase price, I would make mortgage payments on the amount I borrow. If we assume I find financing at 8% for 30 years, I will have to pay my lender 7.34 a month for each $1,000 I borrow.

      Example 2 : $50,000 down payment with $50,000 financed.

               Amount financed     (50) x ($7.34) x (12) = $4,404 is my yearly mortgage balance.

(($10,000 NOI) - $4,404) = $5,596 is my net income after mortgage payments

ROI = (net income) / (down payment)

                                            = $5,596 / $50,000

                                     ROI = 11.1%

     Example 3: $ 25,000 down payment with $75,000 financed.        

           Amount financed  (75) x ($7.34) x (12) = $ 6,606 as my yearly mortgage balance.

(($10,000 NOI) - $6,606) = $3,394 is my net income after mortgage payments

ROI = (net income) / (down payment)

                                               = $3,394 / $25,000

                                        ROI = 13.6%

     Example 4: $10,000 down payment with $90,000 financed.

             Amount financed  (90) x ($7.34) x (12) = $7,927 as my yearly mortgage balance

(($10,000 NOI) - $7,927) = $2,073 as my net income after mortgage payments

ROI = $2,073 / $10,000

ROI = 20.7%

Thank you.