Tuesday, February 7, 2012

Unbeatable Return on Investment

***Warning***  MATH ALERT  ***Warning***

Before you even invest, you should be able to understand your return on investment, i.e. an indication on whether or not you're making a good decision to invest.  Mutal funds will get you about a 6-8% ROI, Stocks about 6-12%, on average (recession jokes aside)...

Below is a simple and very practical illustration of a possible real life scenario.  The scenario is only taken through 1 year, and is conservative.

Home:  3 bedroom, 2 bath, 2 car garage in Fort Collins
Purchase Price.................$180,000 ($160,000 Home Value, $20000 Land Value)
Down Payment................$36,000 (20% Down)
Loan Amount..................$144,000 (Purcahse Price - Down Payment, 30 year fixed, @ 4.75%)

Assumptions
Appreciation....................2%
Rent Increase...................0%
Expenses Increase...........0%
Income Bracket...............20%

Expenses (Monthly)
Principal + Interest..........$751.17
Property Taxes................$130.00
Insurance.........................$60.00
Mgmt./Maint...................$125.00
Total Expenses................$1066.17

Income (Monthly)
Rent.................................$1300.00

Net Cash Flow.................$233.83

Cash Flow Before Taxes
Yearly Cash Flow............$2805.96
Yearly Principal Paid.......$2222.03 (1st Year)
2% Appreciation..............$3600.00 (1st Year)
27.5 Yr. Depreciation......$1163.63 (((Purchase Price-Land Value)/27.5 Years)*(Tax Bracket)))
Total CFBT......................$9791.92

Total Return on Investment
(Total CFBT/Down Payment) = ($9791.92/$36,000) = 27.2% Return on Investment

A 27.2% return on investment means that you should assume to recapture your initial investment within 3.68 years.  Can a stock or bond beat that?

1 comment:

  1. This method also works especially well with calculating ROI on investment properties. When looking at different investment properties, I compare the different ROIs and choose the best option for me. Also, with investment properties, you get to write off your interest payments, which should drive your ROI higher!

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