So too is the case with investing. Just as the Batmobile or the Batarang helps Batman defend Gotham against evil, there are tools out there that can help you defend yourself against a bad investment.
CONNECT asset management’s ROI Calculator is one of these tools. It’s simple and easy to use, but is able to give you make-or-break information on your potential investments. If you want to ensure you’re not betting on a losing horse, there are some key information and numbers that you need in order to avoid disaster.
ROI is one of the most important calculations to do when considering a new income property. ROI stands for “Return On Investment”, and represents the amount of money you’re making on a particular investment.
The formula looks like this: ROI = (gain from investment – cost of investment) / cost of investment
For example, after four years you decide to sell the downtown Toronto condo you invested in. You bought it for $350,000 four years ago with a 20% down payment, or $70,000. It appreciated at an annual rate of 5.82%, which is the compounded annual growth in Toronto over the past 30 years. So that means your condo is now worth $440,127.
Let’s assume you sell it for $440,000 and have a remaining mortgage balance of $250,000. Your gain on investment is therefore, $190,000.
You also had expenses, including closing costs and upgrades, totaling $20,000. So your cost of investment is your down payment plus expenses, for a total of $90,000.
Now, let’s put these numbers into the formula:
Over four years, your return on investment is 111%. That’s not bad! Some investors set a standard ROI they aim for and won’t buy anything that yields less than that.
There are some numbers that we need to know before we start anything else. First and foremost: how much is the purchase price? Second, of that purchase price, what % are you putting down for the down payment?
Let’s use some concrete numbers so we can fully understand this.
So far so good.
Now, we enter a few more details: years to completion, annual rent increase %, and annual price appreciation. If you’re a little unsure about these numbers, we’ve included a couple examples of average annual rent increase and price appreciation to help you out.
Lastly, we’ll need a couple more things which may be a little trickier – monthly maintenance fees, insurance, and all that fun stuff. Once again, we’ve included some ballpark figures to help you out if you’re unsure of what those numbers will be for you.
The CONNECT ROI Calculator can help you decide if a property is worth it or not. Using the ROI calculator, you’ll be able to see the future purchase price of your property when it’s complete, and then five, ten, and twenty-five years after its completion.
Furthermore, the calculator will break down the future price per square foot – and important consideration when you’re looking at condos of different shapes and sizes!
Here’s what the finished product will look like:
All these smaller figures are just a warm-up for the three most critical numbers in the calculator. Firstly: your net cash flow on the property. This is the money that you’ll be raking in month-over-month. This number should always be positive. If you’re looking at a negative number (or one that’s close to zero), you’re probably looking at a bad deal, and you should walk away from that particular condo.
The second of the important figures is your total annual ROI. This is calculated by putting the principal amount you paid down on the condo against your net income and the appreciation that your condo has seen over time.
The third important figure to know is your Return on Invested Capital (ROIC). This formula is your way of calculating the profitability ratio of your investment. It’s not about how much you will hypothetically have in the future, it’s about exactly how much money you’ve invested and how much that money has appreciated.
So as you can see, the CONNECT ROI Calculator is an important tool in any investor’s tool belt. Use it wisely, and you’ll be looking at some “super” profits.
Ryan Coyle, CoFounder CONNECT Asset Management