What Will Your Investment Give You In Return?

One of the most important tools to use when analyzing real estate investment opportunities is return on invested capital (ROIC) which is also known as “Other People’s Money.”

The question you may find yourself asking is, “How do I compare projects and choose a financing methodology that will maximize my return?” ROIC is the answer! Below you will find a comparison on ROIC using your own cash verses financing. Unless you have unlimited cash reserves, ROIC is a necessary tool for any investor to determine how to maximize the available investment money.

For our example, the property in question is valued at $100,000 after completion, and we are calculating a six month loan term. The purchase price is $40,000 and the cost of improvements is $25,000.  As of now, you will require $65,000 of your own cash to fully fund the project. Let us assume you sell the property for $100,000. There are charges, fees and soft costs involved in most transactions. For simplicity, I am going to use the same charges for both examples, a $6000 realtor fee, a $1500 title fee and $2000 for closing costs.

Your Cash:

$65,000

Fees:

$9500

$74,500

With a selling cost of $100,000, you have netted $25,500. With your invested capital at $74,500 we can calculate your ROIC. With a net profit of $25,500 and an invested capital of $74,500, your ROIC would be 34.2%

Sale Amount

$100,000

Interest

$3,539

Realtor Fee

$6,000

Loan Repayment

$74,500

$15,961

$25,500 /$74,500 = (.342) x 100 = 34.2% ROIC.

Now use the same figures, but with ReCasa Financial Groups program that utilizes the powerful benefit of leverage. All charges and costs are rolled up into the loan amount.  Assuming you draw out fully on the $74,500 you would pay interests of approximately $3539 for that six month loan term.

Of the purchase price of $100,000, $74,500 went to loan repayment, $3539 in interest, and $6000 in realtor fees. That leaves you with a $15,961 profit. Your ROIC would be 451%.

$15,961/$3,538.75 = (4.51) x 100 = 451% ROIC.

With the example above, you can see that with your own cash, you are getting a ROIC of 34.2%. However, by simply using the power of leverage, you get a 451% ROIC.  That is more than 13 times the ROIC!

Many investors focus primarily on profit. Successful investors are confident in their ability to generate a profit on a real estate investment, and have learned that in order to build substantial wealth; the ROIC calculation is the best tool!