Use your Own CASH or use OPM?
Calculate the ROI for yourself
ROI (Return on Investment) is a term to describe how much you profit from your investment. It is the percentage of money made on an investment after all the costs associated with that investment are subtracted. So, if you invested $10 and earned $1, your ROI would be 10%, assuming you get your original $10 back.
The basic equation is:
Net Profit / Total Investment * 100 = ROI
Let’s look at the two basic methods of applying this equation to real estate investments:
1. The OPM (Other People’s Money) Method of Investing
Suppose you purchased a house for $100,000. The needed rehab was $60,000 and the final sale price was $200,000. Let’s also assume that the investor only had to come up with a $10,000 down payment and the rehab costs.
40k (200k sale price – 160k costs) profit / 70k (60k rehab & holding costs + 10k purchase down payment) investment = .57 x 100 = 57%
2. The CASH Method of Investing
If the investor pays for everything with his own money, the ROI will decrease. Using the equation above and the different costs associated with paying CASH for everything:
$40,000 / $150,000 (costs without any interest or points paid to lender) = 26%
The first method allows for the use of leverage, so it is possible to DOUBLE your investment when leveraging. Borrow as much as you can maintain and run double the projects, if possible to do 2 in the same time as 1, or stagger them out so your crew jumps from 1 project to the next. We have found a good rhythm with 3-4 going at once. We’re able to keep a small crew employed for several years full time. This rate is about 10 houses each year, or 1 every 5 weeks. Be careful to schedule extra time for emergencies, holidays, and vacations for everyone, including YOU.
Your rate of return might be lower when you use your own cash, but your risk of personal loss is higher and your return is lower. Which method you choose is up to you. The point is to stick to one method when comparing different prospective investments. ROI can be an excellent tool to determine which deal is better than another.
Getting an accurate ROI estimate really isn’t possible in real estate. You never truly know your future selling price or how long it will take. Repair estimates can be off as well. That’s why it’s important to estimate high on your costs and low on the income. Be conservative and you’ll always be pleasantly surprised in the end!
If you want to find out more, reach out to us at https://www.LesliePurdy.com or text/call (321) 209-INFO(4636).
About Leslie Purdy, Real Estate ProfitabilityTM Author, Mentor and International Speaker
Leslie Purdy is a third-generation real estate investor with a lifetime of experience. She and her husband have actively been repairing, rehabbing, and working in real estate for more than 40 years. They are seasoned investors who have made it through all the ups and downs of the real estate market and grown their net worth exponentially.
If you want to find out more, reach out to us at http://www.LesliePurdy.com or call (321) 209-INFO (4636.