This blog is a continuation of our series on how to use our hard money calculator to evaluate a real estate flip, maximize profits and avoid costly mistakes. To read the first installment, please click here. Today we will be covering a fun part: profits, return on investment and my personal favorite – return on the cash you invested in the transaction.
Hard Money Calculator Helps To Evaluate Your Profits
Calculating net profits is easy. It’s the final sales price of your property minus all your expenses including, but not limited, to original purchase price and renovation costs. The key words here are “not limited”. If you skipped the first part of our hard money calculator blog, please go back and re-read it. If you simply subtract purchase price and renovation costs from your sales price, you will overestimate your profits. In fact, your expenses include purchasing costs, holding costs and selling costs. You must take them into account when calculating your profits.
How To Calculate Your ROI Using a Hard Money Calculator
The next step that our hard money calculator helps you do is to calculate your return on investment or ROI. Return on investment is a measure you should use to estimate the performance of an investment. To calculate the ROI of your deal, divide the net profit of an investment by the costs associated with the project. Let’s look at the numbers auto-populated in our hard money calculator.
The net profit for that particular project is $39,175. The costs associated with the project total $310,825. Following the formula above, your ROI will be $39,175 divided by $310,825 which is 13%. Is this ROI good or bad? It depends on how solid your numbers are and what alternatives you have to invest your time and money. For more thoughts on the ROI that you should be shooting for, read our previous blog on Flip vs Hold: What A Property Can Tell You.
Annualized Return on Cash is the Most Important Part of a Hard Money Calculator
The most important part of the hard money calculator is the section that estimates the annualized return on cash. Why? Because it shows you the incredible power of leverage that hard money provides! Leverage is the use of borrowed capital – aka other people’s money – to increase the potential return of an investment. This is what hard money is all about. It allows you to not only effectively compete with all-cash offers, but also to use your own capital – even if it’s a modest amount – in a way that accelerates building of wealth.
In fact, I think this section of the hard money calculator deserves its own blog entry. Click here to see what estimated annualized return on cash is and why using hard money is substantially more profitable than having a partner or even purchasing a rehab with 100% of your own funds.