Equity and Reurn on Investment

2 Replies

How would I calculate my ROI, If say I purchase an SFR under market value so I immediately gain 50k in equity at closing. How would I calculate that equity into my ROI?

You will probable get different opinions on this. First, that amount of equity on a buy would be super high. Do you have a potential deal that has that?

Personally, I am most concerned with Cash on Cash (CoC). Does the house cash flow?

if you do want to include the equity on your ROI, then you need to guess on the value if you sell it, remembering the costs of selling in realtor expenses/taxes/closing/etc.

Return on Equity only matters when you sell,  what you need to focus on is cash on cash return,  if you are getting a large jump up in equity then you might also be getting a better cash on cash return or you might be able to get in with less cash and juice up that cash on cash even higher.  Lastly sometime when you get a big equity gain the best choice is to flip it out and capture that equity to reinvest elsewhere.  

All that being said if you want to calculate return on equity, you need to estimate the equity take the net return annually and divide it into the equity

for example if you expect to make 10K a year as a return on the property, and you put 20K down your cash on cash would be a very nice 50% return 10K/20K=50% but if as in your example you were getting a bunch of "free" equity then you still put take the same 10K but instead divide it by the total equity (the 50K plus the 20K you put down) ie 10K/70K= a still nice 1428% return on equity.

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