Epic Real Estate Investing - How to Calculate Return on Investment (and make it grow!) | 625

Episode Date: April 5, 2019

Today, we are showing you how to calculate your return on investment and how to make it grow. Learn how hard your money is working for you, how to make it work harder, and how to use other people’s money to do that. Learn more about your ad choices. Visit megaphone.fm/adchoices

This is Terio Media. All righty. So I'm going to show you how to calculate return on investment and then show you how to make that ROI grow. I've been doing this for my clients at Epic Real Estate and Cashflow savvy for a decade now. So let me show you how it works on today's episode, Financial Freedom Friday. All righty. So if you like the idea of escaping the rat race sooner rather than later, go ahead and click

the subscribe button for me and then click that little bell icon. So that way you don't miss out on future financial freedom episodes right here on the epic real estate investing show. Okay, return on investment, frequently referred to as ROI. Well, I'm going to go over how to calculate that in just a second, but first, what is it? R-O-I. Well, it measures the gain or loss generated on an investment relative to the amount of money invested. Basically, it tells you how hard your money is working for you. The higher the number, the better. The higher the number, the harder your money is working. And so, you know, you work hard for your money, right? So it's only fair. it returns the favor and you want to make sure it's working as hard as possible for you.

So here's how you calculate this. Let's say you bought this house right here for $100,000 and it rents for $1,000 per month. We'll multiply that by 12 to get your gross annual income of $12,000. Then we need to subtract the property's expenses. So we've got taxes and insurance and maintenance and vacancy and management and a good rule of thumb for this is 40%. That's just good, quick and dirty math. And that leaves us with a net operating income of $7,200. So you divide that by what you paid for the property, $100,000, and that would leave you you with 7.2%. That's your cash on cash return on your $100,000 investment. That's the calculation. It's ROI equals annual net income divided by the amount of money invested. So if you understand that,

go ahead and type the word epic into the comment section below for me. That's going to let me know that you got the basic calculation down that you came for. All righty. So now let's make it grow. So instead of paying for the house in full, let's borrow money from the bank to buy this same property. So you put $20,000 down and the bank gives you. you the rest, 80 grand. So how does this change the return on investment? Well, the formula is the same, but the numbers have changed. So you still receive the same net operating income of $7,200. That part didn't change. But now you have to pay the loan payments out of that. So, for example, if you had a 5% interest rate on the money that you borrowed from the bank, your monthly loan payments would be

about $400. Multiply that by $12 for the year, and your annual debt service for this mortgage would be $4,800. So subtract that from your net operating. income of 7,200, and you're left with $2,400 of annual cash after debt service, or CADs, for short. So divide the $2,400 by the $20,000 you invested, and your cash on cash return now is 12%. See, using other people's money is one way that you can make your ROI grow. In other words, your money works harder for you this way. So let's take it another step. Let's take it a step further. See, see, originally we had $100,000 to buy that first house. Well, in the second scenario, we only use $20,000 of our own money, which means we have 80 grand left. We could buy four more houses

in the exact same fashion. So instead of receiving a 12% ROI on 20,000, we're now receiving that 12% ROI on 100,000. And we can still make your money work even harder. And this might be obvious, but if you increase the income, like say, like raising rents, your ROI, it's going to go up. If you decrease expenses, like, you know, shopping around, say, for cheaper insurance, Your ROI is going to go up. If you do both, it really goes up. So we've been showing people how to do this in real life with similar numbers to these for a decade now

at Epicproacademy.com. Or more and more often, we're just flat out doing it for people at cashflow savvy.com. So if you got what you came for, give this video a like for me. If you know someone this could help, feel free to share it.

And if there was anything unanswered for you, go ahead and let me know in the comment section below. I'll make sure I'll get those answered for you. I'll fill in any holes there might be. And then I will see you next week on another episode of Financial Freedom Friday. Take care. This podcast is a part of the C-suite Radio Network. For more top business podcasts, visit c-sweetradio.com.