Whats the difference between Return on Investment and Return on Equity? Why does it matter? These are some of the issues we address as we take a dive into two common but often misunderstood metrics used my real estate investors to determine their returns. Single Family House currently worth 75K Bought 5 years ago for 50K Rents for 1K per month Expenses are $400 per month Monthly Cash Flow $600 1) Simple def. Return on Investment vs Return on Equity 2) Calculate Return on Investment using example ROI= (Current value of investment – cost of Investment) / Cost of Investment Example = bought for 50K sold for 75K = (75K-50K) / 50K = 25K/50K = 50% ROI 3) Calculate Cash on Cash Return Cash on Cash = Annual return / Cash Paid = (1000-400*12)/50K =$600*12/50K = $7200/50,000 = 14.4% First calculate annual return = $600*12; then divide by investment 4) Calculate ROE –cash on cash return Same as cash on cash but substitute equity for invested capital (purchase $) $7200/$75,000 = 9.6% But what if value was 150K then only 4.8% 5) Also important to consider leverage (did whole video on this-episode 9)—equity builds over time so return drops over time 20% down with payment of $264 (20 yr, 5%) New cash flow is $336*12= $4032 (side note 5x as many deals-cash flow actual $1680) ROI is 75K-40K/10K =350% ROI! Cash on Cash Version $4032/10K = 40.3%! 6) As equity increases though amortization and appreciation. This lowers ROE ROE initially is the same your equity is 10K but what five years later. The house is worth 75K $4032/(75K-40K) ; $4032/$35,000 = 11.52% But how much would you really owe at 5 years? Actually its 31K so the real formula is $4032 / (75,000- 31,000) = $4032/ 44,000 = 9.1% 10 years? 22K owed maybe 80K in equity? And only 5%ish Which is why it’s important to continually reevaluate the return on equity Related Videos The Leverage Episode was episode 9 Check it out here https://www.youtube.com/watch?v=cS6RbGpRzgE&t=34s Also see Episode 11 about how to invest in bigger deals with little or less money https://www.youtube.com/watch?v=sYZOltItqso&t=93s Episode 5 on the four sources of returns https://www.youtube.com/watch?v=--fqlcKjwW8&t=32s We are currently offering a free cost segregation benefit analysis. For more info see the episode we did on cost segregations https://youtu.be/nOnYBIAYOC0 Ready to get started with your free cost segregation benefit analysis https://www.thecostsegguy.com/oldfashionedrealestatehome Be sure to check out our website www.oldfashionedrealestate.com and like this video and subscribe to our show. We love it when we hear from our viewers so be sure to comment here on YouTube or on our Facebook page facebook.com/oldfashionedrealestate You can find both Brian Levredge and Jeffrey Holst on Facebook and can find out more about Jeff at jeffreyholst.com *** FTC LEGAL DISCLAIMER *** Some links found in the description box of our videos may be affiliate links, meaning we will make commission on the sales you make through these links. This is at no extra cost to you to use my links and or codes, it's just one more way to support us and our channel.