Quickly compare the ROI of your investments.

by | Jul 30, 2019

Net Profit divided by capital investment equals ROI. Done. See that was quick! But probably not helpful as most reading this are very familiar with the above formula.

The challenge comes in being able to quickly assimilate the data or even properly calculating the right data in the first place. This often leads to investors having much lower returns on their money (and in real estate very often their time) thank they think, and often much lower than alternatives that don’t require all the time and effort to go along with it.

Let me first give some quick definitions of investment acronyms:

  • ROI: Return on Investment (net profit including equity /input=ROI)

  • IRR: Internal Rate of Return (same as ROI but specifically does not include risk, debt and other costs)

  • ConC: Cash on Cash Return (same as ROI but does not include equity, only cash received)

  • AROI: Annualized Return on Investment (Total ROI averaged out over investment time frame)

  • ROT: Return on Your Time (what was the time you spent on the investment worth to you?)

I digress.
This whole ROI subject could actually change the way you invest all together. The reason? Risk, stress and ROT. The truth of the matter is most investors don’t know what their true ROI is on their investments. Moreover, what their risk factors are. And often one of the biggest of all, the time factor, or what I call ROT.

The truth of the matter is most investors don’t know what their true ROI is on their investments.

Making the most out of your investments is not just the money you make and the potential tax benefits. How about the “ROT” or return on your time? For example, if you purchase an apartment building that needs to be repositioned with repairs, updates, new tenant base, and re-leased? That would take quite a bit of time, effort and if you don’t have your systems down and a good team in place, all it will create is stress! So, make sure you consider all the factors of “Return on Investment” when developing your strategy.

I will oversimplify and say there are two investment strategies when it comes to ROI.

First is the active investor.

This is someone that trades their own stocks or buys real estate as an owner operator. Another might be a hard money lender who is constantly trying to turn loans.

Studied, practiced and done well, active investing can be where the highest returns are. They also carry a large amount of effort and potential risk. In the real estate world this can cost a serious amount of time and money. Think about it… do you want to be doing your own unit turnovers, maintence, bookkeeping, taxes, leases, evictions, etcetera? No! Even if you can do some of those things better than someone you might hire, you don’t want to bottleneck your investment by being responsible for it. That costs money and yes of course a lot of time! As an active investor you may have the time to do this. That is why most active investors do nothing else. This is the type of commitment it takes to be an expert active investor.

The second kind is passive investment.

For the general public this might mean bonds or mutual funds. Although these are considered somewhat predictable investments, they are low return and the financial planner your investing with has zero control of the investment performance. Don’t get me wrong, a small percentage of these folks are really good and can take good care of you. But according to Tony Robbins book “Money Master The Game”, 96.4% of the time you would be better just buying an index fund and settling in for the long term.

However, for some select groups of investors there are private investment opportunities. For example, in real estate, as a professional investor I allow other investors I work with to participate in the deal that I am doing! This investment is passive in the sense that the investors are not required to do anything! In some cases, these private investments have the best of both worlds!

For example, right now I have an investment opportunity that allows investors to buy in as an owner in a large 200-unit apartment repositioning that I am currently under contract to close! My team and I do all the work, but the investors participate in active investor type returns like cash flow, equity and tax benefits! The downside for many is this opportunity is for “Accredited Investors” so not everyone can participate.

If you’re not accredited, consider doing the education, research and leg work yourself as an active investor for enough time until you can leverage other people’s time and actually get ROOPT (return on other people time).

True freedom through cash flow does not mean giving up your weekend to work on a property. It means having your money work for you, so you enjoy your freedom, time and energy. Find people that can help you make the most out of your investment. Get out your road map because it comes fast, but with good planning you can design your own journey and that’s freedom through cash flow.

One comment I hear often from investors is “I think I will just wait and think about and see what happens in the economy over the next few years”. These same investors let their money sit on the sideline waiting for the opportunity of a lifetime. We all know you can’t win sitting on the sidelines. And while you’re sitting around, the deal of a lifetime is passing you by. I am not saying run out and invest your money with anyone or in any stock or piece of real estate. Especially in a heated market like most are. I am saying find somebody who has a track record of success in the type of investment you are interested in and get your money working for you! If you do nothing you will be an ostrich. Don’t be an ostrich. Life is dynamic and unpredictable.

Calculate your ROI. It’s easy to calculate the income, but make sure you calculate the expense. Not only every expense of the investment or property, but the risk expense, the stress expense and the big one, the time expense.

If you’re an accredited investor and you are interested in the 200 unit apartment investment I mentioned, visit: https://www.extantrealty.com/events/opportunity-knocks-art-of-the-deal

or give us a call at 509-414-5123.

Happy Investing!

Tyler Vinson

Tyler Vinson is Founder and Chief Executive Officer of Extant Companies. He has been personally investing in real estate since 2001. He became a Realtor in 2005 and founded Extant Realty in 2009, formalizing his real estate niche to serve real estate investors with a focus on cash flow investment properties and property management.

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