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.
What You Will Learn About How to Calculate Return on Investment (and make it grow!):
- What return on investment is
- How to calculate it
- How to make it grow using other people’s money
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Speaker 1: This is Theriault Media.
Matt Theriault: Alrighty. 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 Cash Flow Savvy for a decade now. So, let me show you how it works on today’s episode of Financial Freedom Friday.
Alrighty. 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 gonna go over how to calculate that in just a second. But first, what is it? ROI. 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 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. Well, multiply that by 12 to get your gross annual income of 12,000 bucks. 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 as 40% that’s just good quick and dirty math. And that leaves us with a net operating income of $7,200. So, we divide that by what you paid for the property, 100,000 and that would leave 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’ve got the basic calculation down that you came for.
Alrighty. 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 the same property. So, we put $20,000 down and the bank gives you the rest, 80 grands. 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 bucks. 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 bucks. 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. You 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 shopping around and 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 cashflowsavvy.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 comments section below. I’ll make sure I’ll get those answered for you. I’ll fill in any holes in there might be, and then I will see you next week on another episode of Financial Freedom Friday. Take care.