# Rich Dad Education – Real Estate Blog

Dedicated to Elevating the Financial Well-Being of People from All Walks of Life

## Calculating Return on Investment

There is a lot of discussion today about, “What is a deal?”  A deal is not the same for everybody.  Some people are looking for cash flow properties and some people are looking for appreciation.  There are two ways that you can make money on a deal: cash flow and/or appreciation.  I would like to have a discussion about these two ways to make money.

How do I determine if this is a deal? In order to answer this, you need to factor in four things.  How much is needed for the initial investment?  What amount is needed to cover the down payment, the closing costs, the carrying costs and the repairs?  For example, if you have invested \$50,000 for those four things, what would make this a deal?  It depends!  It depends on how much that property can make for you in the next 12 months from the two categories that I mentioned before, appreciation and or cash flow.

Cash flow is the money made from all the income generated by the property minus the expenses.  Typically cash flow is determined on an annual basis.  So if the cash flow on the property is \$5,000 and you invested \$50,000, then you are getting a 10% return on investment.  You determine the cash on cash return by taking the annual cash flow in this case \$5,000 and dividing it by the initial cash investment of \$50,000. \$5,000/\$50,000 is a 10% cash on cash return.

The next number we need to know is appreciation.  Appreciation is determined by the surrounding properties and the economic trends.  If the economy is strong then the supposition is that the area will continue to appreciate.   If the property increased in value by \$5,000 based on properties in the area and strong economic conditions, then you can assume that the property will continue to increase in value by \$5,000 a year.  Market appreciation is a result of supply and demand.

There are two types of growth: market appreciation, as discussed above and forced appreciation.  Forced appreciation is where you do something physically to the property to increase its value.  You may paint or fix up the property or add square footage or a bedroom or bathroom.  Once you have improved the property, then you will be able to sell it for current market value.

Back to determining if this is a deal.  Let say that the property has \$5,000 in profit from cash flow, and \$5000 in appreciation, this means that the property profit is a total of \$10,000.  To determine the Return on Investment, you take the total profit from appreciation and cash flow and divide that by the initial investment.  In this case that is \$10,000/\$50,000 for a 20% return on investment.

Ultimately, you are the only one that can decide if the property is a good enough deal that you want to move forward on it.  Make sure that you consider all the expenses and run the numbers before you purchase a property.  It is too late to crunch the numbers after you have purchased the property.

Rick Maryanski
Rich Dad Education Elite Trainer and Mentor

### 12 responses to “Calculating Return on Investment”

1. Sarah Leighton April 11, 2013 at 8:37 pm

Go Rick. I know this is second-grade but I continue to learn from you. Thanks again. Sarah Leighton, Houston

• Erik Maryanski April 12, 2013 at 6:12 pm

Both Richard Maryanski and Erik Maryanski teach the
Creative Finance Class Live and On-Line, as well as Mentor around the United States.
If you are interested in more in depth information about Creative Finance,

2. Gina Ferrell April 11, 2013 at 9:41 pm

I just wanted to tell you that this was very enjoyable, and I thank you for breaking it down for us beginners!:) It’s very easy to follow along and understand. I appreciate that today!

3. Sabrina Berg Carapia April 11, 2013 at 11:36 pm

Thank you for the simple, but powerful explanation @!

4. S. Sridharan April 12, 2013 at 6:52 am

Dear:
Seen your article and it is good. My thinking is that regular cashflow is better than selling the
Real Estate investment, after one year or so. We can use the cashflow every year for Investing
and increase our Financial freedom. We do not know whether the Real Estate investment
will appreciate, quickly, as desired by us. But, we can rest assured that cashflow will come every year and CASH is the King. We can also sell the Real Estate investment, during the time of
appreciation. Till then, we can receive the cashflow.

Thanks & Regards.

S. Sridharan
Chennai, INDIA.

• Sabrina Berg Carapia April 12, 2013 at 7:49 am

Dear S. Sridharan,
Note that this post is about how you can look at a real property investment option, and decide if it is a Good “deal”. Many real estate investors struggle to determine if they are truly buying a good investment, which will cover both cash flow and appreciation over time.
So, yes cash is king, but if you purchase a real property in a area where prices are dropping, and consequently the neighborhood is turning from a good to a bad, your cash flow might suffer trough out the years, since the type of tenets that the neighborhood might be attracting might be not what you previously anticipated in the past. So be careful.

• Godfrey Kiyemba April 12, 2013 at 10:31 am

Realy this is avery great effective lesson thank you soo much,

5. Erik Maryanski April 12, 2013 at 6:13 pm

Both Richard Maryanski and Erik Maryanski teach the
Creative Finance Class Live and On-Line, as well as Mentor around the United States.
If you are interested in more in depth information about Creative Finance,