How To Calculate ROI In Real Estate
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How To Calculate ROI In Real Estate


So you want to know how to calculate ROI. That’s smart that’ll help you become a good investor. Hey guys, Kris Krohn here
and today, I’m going to show you exactly how you calculate ROI on a home. You need to
know this math. It is ultimately what determines whether you should buy a
property or skip a property. I got a lot of investors in my group and they’re
like, “Should I do it? Should I not?” You’ve got to have standards and you got to
know how to calculate this number. So grab pen and paper. This is going to
be a very important video. So, in calculating an ROI, let’s just back
up for a second. It stands for Return On Investment. And it basically means if you
put money into something, more than just getting your money out, the question is
how much more am I going to get out? And it is normally calculated in the form of
a percent. For example, if I dropped $100,000 on a property
and it was making me 10% annual return then 10% of a hundred
grand is 10 grand. So, I’d expect to get 10 grand every year. And if it was
consistently that for five years then I might average 10%. I’m going to get
over 5 years a total of 50% back which means I put a hundred grand
in. I get $50,000 back on top of my hundred grand. Now, if that was too
much for you, I just slowed that down, re-watch this part again. What I want to
do is I want to help you know how to calculate this competently. Because
that’s when you’re going to decide. Is this property good? I’m going to pounce or no
it’s not? I’m going to run. Now, I’ve got a tool that’s going to make this a little bit
easier for us today. if you go to my website kriskrohn.com, you’re going to be
able to download my free game plan. And that book was written specifically to
show anyone in any financial situation how to become financially free through
real estate. And what I’ve done is I’ve already gone ahead and downloaded it
onto the laptop here. And it’s called “The Ultimate Real Estate Game Plan”. Now, the
reason why I want to show you this is because I’m going to skip down in this
document and I want to come right here. This is an example of a property that I
purchased and I want you to see that it has a 23.06% average annual return. This is mega-hot real estate guys. Most people
are doing 5 to 8 percent. I’m normally double digits. 15% up to 25% on my deals. And when you look at this, you
could get overwhelmed and say, “Oh my gosh, look at all the numbers there are.” Under
income and expenses, there’s an amount for gross rent, taxes, insurance, H-O-A which
stands for Homeowners Association. Property management, vacancies and
repairs, net operating income and the debt service. Debt service means I have a
mortgage. What does it cost to service that mortgage? On the financials,
you have the net monthly cash flow, the cap rate, cash and
cash-return, principal reduction, appreciation, profits on the sale, ROI and
total capital to reinvest. Now, listen. If you’re watching this and there’s a lot
of foreign language here. What I’m going to do is I’m going to really simplify this for
you because this is a professional document that my team uses when
evaluating the thousands of deals that we buy. So I’m going to skip through a
couple more homes here and I’m going to come all the way though down to… Look at
this one more home here. This one is in Florida and the address is 3127
whispering trails. And then down here, this is a 19.99% ROI. Again, another home that I’m actually buying. My cash on cash for the
year is going to be 7% but I’m going to earn an average of 20% or 19.99% each year. That’s the magic
number on why I know that I am buying this house. It meets my criteria. But
let’s look at the simple math for how you can do this. Check this out. We have
here income expenses equals profits. This is… This… This is the basic math that
you’re really going to do on this and I’m going to break this down for you because
you want to know how to do this on your deals. Income minus expenses equals
profit. And profit is what we’re going to turn into a percentage or in other words,
this is how we’re going to get to the return on investment to know, “Are we
going to do this or not?” So, let me just talk through the 4 income
pieces and the 5 expense pieces and then you’re going to be able to gather this
information and do this calculation on their own so that you can actually go
out there and evaluate deals and know what to pull the trigger on. Okay, first
of all, under income. We need you to know if there’s an equity position that needs
to be tabulated in. Now, equity essentially means it’s worth 220,000, I’m buying it for 200,000. There’s a $20,000 of equity. So, basically if there’s a discount, we want to know
what is that discount? That’s going to factor in to the income. And then when we
subtract out the expenses, it’ll help us understand the profit. So the next one
that you see listed there is the gross rent. Now gross means total. And it says
what is the total amount of rent that I’m actually taking
in. Now, we know that there’s expenses in property management that that goes over
here. We just want to add up all of our equity, we want to add up all of our
gross rents. The third thing that we want to know is what is the principal
reduction? In other words, how much am I going to pay the house off for the time? I’m
always going to calculate my ROI’s with my system over a 5-year period of time. I
might hold the home for 3 years, I might hold up for 7 or 8 years
but it’s going to be somewhere in there. 5 years is important because it’s
going to give me an important average. My rents are going to go up with time. So guess
what? I want to know what rent is this year but I want to know what it is in
year 5. Very similarly, I’m going to pay off very little percentage of the house
in the first year but by the third fourth and fifth year, we’re actually
taking thousands of dollars off the cost of the note. That’s going to factor into
profits. So I need to know what is my principal reduction. And then the last
one that you need to be aware of and need to account for is appreciation. Your
property says, “I sure appreciate you. So I grow in value.” We know that real estate
goes up in value over time. Some areas grow at 1% or 3%. Some at 7%. I purchased
my real estate in the markets that have the highest growth potential. I don’t
count on it but I do account for it because real estate over time is going
to give you some of that money. So, I’m going to take a look at equity, gross, rents,
principal, appreciation. And I’m going to figure them out. And then, once I have
this total number… Let’s just say that for this example that that total number
is $80,000. And then what I have to do is I have to subtract out my expenses
because my income minus my expenses will equal my what? Will equal my profit? Okay,
first expense. There will be taxes every year on the property. You’ll actually
have to come out of pocket and pay taxes. Now, often it’s written into the mortgage.
P-I-T-I. Principal Interest Taxes and Insurance. But you still need to be aware
whether you’ve rolled it in or not that that is an expense. And that whether it’s
in it whether it’s rolled into the mortgage, it’s coming out of your pocket.
The next one, insurance. You buy a house, you better get it insured. If there’s a
mortgage, you have to have it insured. So there’s going to be a cost to your
insurance. We want to deduct that. You might have an H-O-A. I buy a lot of my
homes in really nice neighborhoods. So they have a Homeowner
Association fee. And that’s definitely an expense. Then I’m going to have my
property management. If I’m not doing it myself, if it’s not in my backyard, I got
to pay someone to manage this property. Next, I’ve got my vacancies and repairs.
So, it’s not always going to be rented and there are going to be repairs that come up
with time. And then the last one is what’s called the debt service. I’ll just
put at the top here. The debt service is… I have a mortgage, right? I mean, I’ve got
gross rents coming in but I’ve got to subtract out whatever my monthly payment
is. And I’m going to calculate that over 5 years on average. It’s going to be a
little bit of crunching some numbers. But guys, once you break it all down, you can
do this. I know that you can do this. It’s very, very, simple stuff. So, if I were to
take all this out. And let’s just say at the end of the day that this amount came
to $30,000. 80,000 minus 30,000 is $50,000.
Now, I’m really close to having my ROI. Because now I know my profit. And
all I have to do now is compare my profit to what I put in. If I were to put
in. Let’s just say to make this deal happen, let’s say I did put in $50,000 and let’s just say that after I sold it, I got my fifty grand
back but I made $50,000 more. Over five years, I doubled my money.
I turned 50 grand into 100 grand.
Now, if I take that return, that %100 return and divide it by 5,
5 years, it will say 20% is my average ROI. And that my friends is how we
get to the ROI. So just in summary, you got to know your income, you got to know
your expenses. I figure them over 5 years and add all of that up over the
five-year period of time. I subtract them from each other. I get my gross profit
and then I just got to say, “Well, I got to divide that profit up by the number of
years.” I’m basing this on 5 years. I’m making 10 grand a year.
10 grand on a $50,000 investment is 20% ROI. Friends, sounds complicated. It’s
really not. Practice it. Pull out some… Make up some fake numbers and actually
just practice crunching the numbers. Because when you get out there, you find
a hot deal and you’re like, “Oh my gosh, I’m like I’m getting emotional. This is
it. I’m about to make this deal happen.” There’s… There’s this excitement and
emotion that comes up. Do not act on emotion. You can… You should have
your emotion driving you to become a millionaire. You should have your emotion
invested into this commitment of creating wealth. But don’t allow your
emotion to say, “I think it’s a good deal, buy it.” Do that based on the rationale of
the numbers. When you really should get the most excited… When I get the most
excited about a house is when I get this number. Once I know that number, I am
either all-in or I’m running for the hills and there is ZERO middle ground.
Now, you can learn how to calculate this ROI. And you might be saying, “Well Kris,
could someone help me with this?” And the answer is yes. I mentor people with
this. I can actually help you with this. If you want help evaluating your deals,
finding deals, doing all of that. All you got to do is click the link in the
description below and my team’s going to reach out to you. You can actually go and
read up on our services what we do. I will mentor with you. I will work with
you. I will use my unique skill sets and I possess the tools and the resources to
help you create the wealth that you are looking for. So, if that’s going to be
useful for you, take full advantage of it. If you’re not a subscriber, you’re going to
get a lot of free knowledge and application that way as well. Learn how
to do this stuff with me. Let’s go out there and if we can crush it on your
next real estate deal.

18 Comments

  • jorge martinez

    Hey kris I been watching your videos for some time now but I really don’t know where to begin I’m trying to get into the Real State business but don’t know what my first step should be?
    Can you Help me?

  • Lord Arash

    Hi Kris, I’m really frustrated and do not know where to begin since I’m only 16 years old. My dream is to become a great real estate investor/businessman just like you. Please help me brother!, Kind regards Arash

  • Lloyd Loy

    Hi Kris my name is lloyd I've been watching your channel for a long time living in Jacksonville Florida l have $7500 in heloc to use what to buy rental property need help on your opinion thanks buddy

  • Kyle Trent

    Hello Kris, I have a couple questions. 1: how much do you increase your rent every year? 2: you frequently say you will not purchase a property without at least 15% equity. What if it does not have a 15% equity position, but the ROI is somehow without that much equity a 15-20% ROI? Thank you. Videos are great, keep up the awesome work!

  • Fume

    Okay so on your income list, you said you got 80k income. What if the expenses are more than 80k or close to 80k. You just added 30k on your expenses because it was less than 80k. You could’ve added 40k 50k or even 60k. How much would it really be in a real life situation.

  • saul santana

    I have a question and its been on my mind for a while now, im 21 and buying into my first property now im looking into a $60,000 home it has 4 rooms 1.5 baths now should i buy my first single family home as a rental property or should i live in it for a year as a home then rent it?

  • Zoufous Team

    Hi Kris. Great presentation! Just a short question. If I have a mortgage (bought an apartment for 50,000 euro) and I am paying 400 euro every month to the bank, however I am receiving 500 euro from my tenant, so i earned (net) only 100 euro per month is that affects my ROI? Because then I have a 0,002% ROI 🙂

  • Mo Sylla

    He took a long winding road. I appreciate the effort to share,but the goal of it is to break it down.Not to overcomplicate it. I am going back to the drawing board. I will come back with a better way to explain this.

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