Return on Investment

by James
(Glos. UK.)

If I buy a house for $100000 and sell it for $120000 what is my return investment?

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Dec 12, 2009
It all depends on what you put down...
by: Elizabeth Elwell-Cook (Investing in Property Rentals)

Return on Investment is a funny thing... but it's one thing that I love about investing in property!

You see, if you pay all of your $100,000 yourself, in cash, when you buy the property, then sell it shortly afterwards for $120,000, your Return on Investment is going to be approximately 20%...

I say approximately, because it depends on how long you've had the place, how much it's cost you, and how much rent it might also have made in the time you've held it, and the taxes and duties you have to pay in selling it. It can also depend on whether you spent money improving the property too.

But, for the sake of simplicity, let's assume you're living in an imaginary country where there is no Stamp Duty, legal fees, or Capital Gains Tax. It would be the same if you used an option deed (but that's another story!). Let's also assume that you bought it for a bargain price one week, and someone made you a tidy offer for it the next: for $100,000 down, your return on investment (ROI) would be 20%.

BUT, if you had a 100% LVR loan (go see my Glossary for explanations of these terms) where you put no money down, or you used an Option Deed, in theory your return on investment would be infinite (because it cost you nothing).

AND, if you got a 95% LVR loan, where you only put down $5000 to buy a $100,000 property, then sold your property on quickly, the $20,000 profit from the sale would be a 400% return on investment.

If you wanted to know how much the property is returning per annum, you would divide the return by the number of years. So a property you have owned for 2 years with an LVR of 5% and $5000 down would give you 200% p/a.

Not bad!

So, calculating ROI is all about how much money you put down (really, it should include your out-of-pocket expenses too), and how long you have owned the property.

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