What's so great about ROI

[John Hanson]

Financially, how do you evaluate your potential real estate investments? Is "Return on Investment" the best method to use? I'd like to know how each of you approaches your investments.

For instance, I read of one investor who values his time at $500/hour and requires a specific ROI. I know someone else who is a full-time investor / property manager who values his time at $50 per hour (he does lot's of maintenance / roof repairs, etc) and has a different ROI.

How do *YOU* evaulate potential investments and choose one over another. And why use ROI over another method? Thanks for your thoughts!

[J Scott]

Experienced investors are going to examine a number of different indicators of success -- from ROI to cash-on-cash return to IRR to cash flow to hourly wage/rate to total return, etc.

The most important indicators are going to depend on the specific investor and his/her goals.

For example, an investor who is looking to retire and earn $10K per month for the rest of his life probably doesn't care very much whether his cash-on-cash return is 10% or 20%, as long as his cash flow is $10K per month.

But, another investor who is trying to build a $5M net worth over 10 years is very much going to focus on IRR-type metrics, as those are going to be most indicative of his ability to succeed (or not).

Personally, the bulk of my short-term goals are spending time with my family, as I have two young children. So, I'm focused on hourly wage -- or, more specifically, ensuring that I'm not wasting my time on tasks that aren't earning me several hundred dollars per hour -- and am also focused on net income. That said, I'm always acutely aware of my ROI metrics (cash-on-cash return and IRR) for my projects, as I want to ensure that my investing skills are always improving.

But again, everyone is different, with different goals. And the metrics are going to be directly related to those goals, with successful investors focused on multiple different metrics to varying degrees.