Calculating ROI with no money down

4 Replies

Hello All, 

How would you look at a deal in terms of return if you have no real out of pocket money down?

We just got our first deal under contract and the local bank we are dealing with is doing a two loan process to do the deal. Property has a 3bd. 1 br home in the front and a detached Studio apartment off the back alley. 

First loan is a construction loan, 6month, interest only. - Includes purchase price and then the repair cost (total loan not to exceed 85% of after repair value) 

Second loan is a traditional commercial loan, with a $100 refi fee.

Here is how the deal is looking: Numbers may not be concrete but hopefully you see what i'm getting at. 

Price of property: $36K

Price of repairs: $10K - $15K estimated

After repair value: $65K+ estimated (waiting on appraisal)

Realtor Fee: $1500 flat

construction loan fee: $500 + appraisal, inspection, etc. (estimated total of $900)

total loan: $53,400, 25 year term, 5% interest

Rent should be around $1000 between both units

After expenses, taxes, insurance, maintenance, repairs, etc. we are figuring around $200-$300 in cash flow.

What $ values would you use to look at ROI? I have no money down in the deal, so the ROI equation would say i have infinite returns (the bigger pockets calculator confirmed this as well).

As awesome as this sounds, i don't think it is a great way to analyze deals. Thoughts on how you would look at it?

Thanks in advance. 

MT

Well a cash on cash return is sort of silly (though you do have some cash in the closings).  Basically look for cash flow and growth in equity... compare that to the risk on your cost side to make sure you're covered.

Where on earth did you find a bank that would fund that way... and up to 85%??  I had some sweat deals but am now officially jealous!

Yep, ROI would be infinite. But how about ROE (return on equity)? Looks like you will be all-in at around 50-55. Let's call it 55. If you were to list it and sell it - assuming that you could really get 65 out of it (minus commissions and such), your equity is around 7 or 8k. Let's just call it 8. If your positive cash-flow is $250 per month, that's 3k per year, making your ROE = 3k/8k = 37.5%. Now, if you were to sell the thing instead of renting it out, could you take your 8k and make more with it by investing in something else? Could you make more than 37.5%?

From a personal perspective, because you have an investment of zero and receiving cash, your ROI is infinite ( Assuming there is an availability, you can theoretically do an infinite amount of these deals ). You can technically do an opportunity cost calculation where you place the value of your time as an "investment".

The structure of the DEAL itself is not infinite, if i am reading it correctly, you received 85% financing, so the 15% down + all associated costs ( interest is a cost and should be calculated based on what period ROI you are looking for) + repairs are your investment.

Think of it as outflows vs inflows type situation.

So basically you're asking, "How do I calculate my return on investment when I've made no investment?"

Simple answer: you can't... With nothing invested, a rate of return cannot be determined.

You'll want to look at both cash flow and estimated resale value. In my opinion, estimated resale value is most important since your debt service will likely eat up most of your cash flow.

With that said, determining ROE makes the most sense