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What is Return on Investment (ROI)?


hey hey how’s it going everybody this is
Billy keels with KeePon Cashflow I’m back and I want to talk to you about one
of the metrics that is probably the most key and the one that gets most of you
will get most of you started in your investing career and that is the return
on investment specifically I’m going to talk to you about something called cash
return on investment because a lot of times that’s what you may mean but
that’s not necessarily what you’ll say and but the reason that I want to talk
to you about this is I think most of you know that I love to play the game
cashflow 101 and with that game it’s one of the ways that helps to really buy by
practicing helps you to experience over and over and over and over different
scenarios and through that it gives you the opportunity to learn grow make a lot
of mistakes and get better even as you go by so when we talk about leave the
return on investment as I’ve been watching a number of the people play
specifically in Barcelona it you know I watched them go through the motions and
they were seeing ROI and ROI and ROI and ROI but recently I asked somebody to
tell me what ROI meant and so when there was kind of a well a blank look I
thought let’s take this and use it as a learning moment so I want to share with
you one of these cards I’m not going to use the exact card but this is a one of
the small deals but I’m going to use a similar example so that you get an idea
of what a return on investment is and why it can be important for you and most
importantly how you can use that as you go out and you look for investment
opportunities so I’m just going to change something really quickly I put
myself here in the in the side hopefully you can see me but not too much and
let’s go right into the example of what we’re talking about when we’re talking
about return on investment I’m going to use an example and most of you know that
I love to talk about multifamily real estate so we’re going to use a
multi-family example and we’re gonna say that you’re gonna go out and you’re
gonna make a purchase price of a building and that building you’re gonna
go out and you’re gonna pay a million for that building that could be a
million euros that could be a million dollars let’s say that you’re gonna use
a million in this particular example you’re also
going to take out a loan but the money that you’re going to come up with for
your down payment you’re actually going to be putting down 200,000 all right
once again that can be euros that can be dollars it can be whatever your currency
is it’s just for the example so when you put that $200,000 down as part of the
down payment what that means is you’re going to then take up a you’re gonna
take up a mortgage and that mortgage is going to be eight hundred thousand which
gives you the difference between the two hundred thousand eight hundred thousand
gives you the purchase price of a million and we’re going to say that this
particular investment gives you a net monthly cash flow of one thousand per
month and return on by definition one of the things that it
does is it looks at a over a period of time let’s call that time period 12
months so if we take that $1,000 or Euros per month
multiply that by 12 you’re actually looking at 12,000 in terms of your
annual per year is what you’re looking at 12,000 per year let me make that a
little bit prettier here make that 12,000 per year and that’s what you have
so that’s where we’re gonna start from these are some of the basic principles
so basically what we want to look now is what is your return on your investment
or your actual cash so one of the better ways to talk about this is what is your
cash return on investment so let’s call that ROI and specifically I’m just going
to put here a C which means cash return on investment so let’s look at what
you’ve actually done you’ve used in a year you were able to come up with
12,000 $12,000 $12,000 or 12,000 euros and you look at that based on what you
initially put in and so what you initially put in was 200,000 and in that
12-month period let’s look at what that return is for
you so that return is the 12,000 that we looked at before
/ the 200,000 that you’ve actually placed so what we want to do is 200,000 that
you’ve play sorry the 12,000 divided by the 200,000 that you’ve actually placed
of your down payment and that equals a 6% return so if we go back and we can
look at that and we can see that that is a 6% return cash return on investment so
the idea now that you have this you’ve gone from the data that you had to now
you have a bit more of information so that you placing your 200,000 in one
place was able to return 12,000 during the first 12 month period so the
question that you should be asking yourself is if you had $200,000 to use
is that $200,000 best placed in this return that’s going to give you a cash
return on your on your money in the first 12 months of 6% or should you be
looking for something that is more or may you maybe you want to look at a
different type of investment that can give you less but even less risk
quote-unquote so you know is it just to help you understand how does that where
does the cash return on investment come from what can you use how can you use
that information and better gauge it against other investment opportunities
so they can help you know whether you should make put your money in one place
or put it in another place and so that was because the cash on cash return on
investment keeps coming up I thought we’d just take it over take a little
look at it in the video I hope this has been really helpful for you if it has
been helpful for you I haven’t asked for you could you make sure that you share
this video with your with your friends so they can also bring value to them I’d
really appreciate that and also to is one of the things that I’m going to
include in this video and talk a little bit about it in my book I’m gonna give
you a free copy of my book for for continuing to watch so I’ll leave that
in the in the video here so once again if you can share this video with your
friends I’d really appreciate that and also leave any comments that you have
here or or just below in the box and that’s here so once again my name is
Billy keels and with keep on cashflow that’s my two cents for today and as
always hasta la próxima you
you

Glenn Chapman

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