Learn how to Double your Retirement in 45 days or Less! Watch Ron's new webinar here: http://www.ron-phillips.com/3xmarket/?clid=ROIYT How to calculate Return on Investment with Ron Phillips. We discuss the difference between cash return on investment and calculating the entire return on investment using an example investment property. What is true cash flow and what to make sure to figure in to your pro formas. Hi everybody, Ron Phillips here. I want to take a couple of minutes and just answer a question that I received in an email this week. Ralph from Southern California asked me how do we figure the return on investment for the properties that we send out in the Monday emails? And so I want to take a second and not only answer that question, but just answer the question how do you figure out return on investment in general. And let's use the property that I sent out this Monday, that's the one that Ralph was asking me about. The first thing is the purchase price. There's some figures that we need to be able to do the return on investment calculation, OK? First one, this is a 138,900 property, OK? And for this example we chose 25% down as our down payment, which is important because that's actually our invested capital, that's the outlay on the property. That actually is $34,725. OK? So this is our invested capital. And the formula to figure a return on investment is very very simple, OK? It is very simply the cash flow or the cash return, OK, we're gonna call it cash flow, divide it by your invested capital. That is the formula, OK? Very simple. So you need to figure out what your invested capital is which we just did, and we need to figure out what our cash flow is. And we need to figure out as true a cash flow as we can so that we can pro forma this thing or get a true cash on cash return. So how do we do that? First thing is we need the income. And I usually send these out on a monthly basis, in a second we'll annualize it. So on a monthly basis our income on this property is $1,650 a month. That's what it's leased for and it's currently leased and I think the lease was for two years. So $1,650 is the income. And the expenses on this property, on every property they include your principal, your interest, your taxes, your insurance, homeowners association dues if there is one, and then property management fees and any other expense associated with that property. OK? Add all those up, that's your expense for the month. And on this property that is $974. OK? So our cash flow then is $676. So on an annual basis, our cash flow is actually $8,112. Now, if you divide this number because this is our annual cash flow, simply divide this number by your invested capital and that will give you your return on investment. Now, here's where things get a little tricky and this is my warning to you guys, ok? And Ralph, if you've already done the math, you know that this figure is not actually what we send out. It's actually a little bit higher than what we send out. There's a reason for that, OK? If a real estate got all of the expenses right and got all of the income right they could probably get there. But that's typically as far as they go. On this property, that's about a 23, I believe that's about a 23.5% return on investment. Now this is not accurate. And the reason it's not accurate, folks, is we haven't figured in vacancies and we haven't figured in maintenance. And long term maintenance increases, vacancies can change but they don't go up as a property ages necessarily. But maintenance does. OK? So on our first year pro forma there's not going to be a whole lot of maintenance because these properties are completely re-done and they come with a warranty so there's not gonna be much of that in your first year. But there is a vacancy rate, and we have to figure vacancy rate in there. We get our vacancy rate from our property management companies, and it's simply a percentage. That percentage comes off of your income and it's just a number. And it's as close as we can get to accurate on true cash flow is by using the number that the property management companies give us because they know what percentage of homes are vacant in that particular area. Now in this area it's 3%, OK? So we had a 3% vacancy rate that we took off, and we took that off before we subtracted everything out. So this number right here was different, it was lower, and it actually gave us a 22% return on investment. OK? That's what ours came out to be. Now this property was actually leased for 2 years, so we're most likely not going to have a vacancy for two years. But we still factored the vacancy in there to bring down your cash return on investment. Ok?
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