# Calculating return on investment



## sepandee (Aug 14, 2015)

Hi folks,

Hope you can all help me out with calculating a return on investment (ROI).

Let's say a year ago, I bought a property. I rented it out for a year, and now I sold it after a year. Here are some hypothetical numbers:

Purchase:
* Purchase Price (P1) = $1,000,000
* Downpayment (P1a) = $300,000
* Principal on mortgage (P1b) = $700,000
* Land Transfer Tax (T1)= $40,000
* Broker for mortgage (C0) = $3,000
* Transaction Costs (TC1) = $3,000

Then during the year the property is rented out. You have:
* Mortgage (M): $30,000
* Payment towards Principal (m1): $20,000
* Payment towards Interest (m2): $10,000
* Property Tax (C1) = $5,000
* Maintenance Fees (C2) (insurance, gardening, etc.): $5,000
* Realtor Commission (C3): $3,000
* Rent: $3,000 per month, or $36,000 in the year (which does not include the Realtor Commission that's taken out, so really, you only get $33,000 of the rent)

Finally, you sell the house:
* Price sold (P2) = $1,150,000
* Cost of upgrades before selling the house (C4) = $5,000
* Principal Remaining on mortgage (P2b) = $680,000
* Transaction costs, including commission and mortgage penalty (TC2) = $58,000
* Tax paid on the capital gains portion of this transaction (T2) = $25,000

I think those are all the variables. 

Now, knowing all this, how would I go about calculating the ROI? The ROI has two parts: one is the ROI from cashflows, the other the ROI from capital gain. I'm guessing the final ROI should somehow incorporate both.

Basically, I want to know whether this transaction from start to finish was a good one, compared to a return of, say, 8% had I invested the downpayment, and any money I had to pay with the negative operating cashflows during the year, in the stock market.

Thanks. I appreciate the teaching


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## Newby1983 (Apr 9, 2015)

I think it works to 3.7%. You made $11,000 off your $300,000 investment by taking all income ($150000 appreciation plus $33,000 rent) subtract all expenses (mortgage interest, Land transfer tax, capital gains, maintenance, brokercommission, upgrades, etc). You should also include your time (or the cost of a property manager). I don't thinkni saw insurance either and other closing costs which would lower the ROI.


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## Cal (Jun 17, 2009)

You may want to factor in for insurance as well, as you never know what can happen with a tenanted property.

I also calculate in the loss of investment potential for the downpayment money as an expense in my calculations (as it is only fair to balance against the calculated capital gains on the other end), so in your example, $300,000 tied up in a property for a year at a rate of 4% (for a mild benchmark), would cost $12,000 in lost investment potential.


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## Woz (Sep 5, 2013)

Starting amount = $300k + $40k + $3k + $3k = $346k
Ending amount = $1,150k - $5k - $680k - $58k - $25k = $382k
Yearly Income = $36k – ($30k + $5k + $5k +$3k) = -$7k

ROI = ($382k - $7k) / $346k – 1 = 8.38%

Or in excel (easier if it were more than one period)

ROI = rate(1, -7000, -346000, 382000) = 8.38%

That’s your return on investment (i.e. return on downpayment and yearly cashflows).


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## sepandee (Aug 14, 2015)

Three replies, three separate answers 
Insurance is there, under maintenance.;l
Cal, you're discounting at 4%? What was your final #?


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## GreatLaker (Mar 23, 2014)

Here is a thread on CMF showing how to calculate internal rate of return for an irregular series of cash flows using Excel or Open Office XIRR formula:
http://canadianmoneyforum.com/showthread.php/14538-Question-to-OpenOffice-users-how-to-calculate-XIRR

Be careful to have all cash outflows as negative and cash inflows as positive numbers.
Also note for periods over a year it calculates annualized return. For periods less than 1 year it also annualizes the return.


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## nobleea (Oct 11, 2013)

Using XIRR, I get 8.29%. Depends on if you annualize or put the expenses in monthly. I put in a monthly net expense of 583 on the first of every month. Buying on Jan 1, selling on Jan 1 the next year.
XIRR only cares about the money you put in and take out, not necessarily what the bank puts in.
so your starting cost is 346K (downpayment, transfer tax, mortgage broker, closing costs).
And your end point is the net to you, 382K


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## nwmea (Sep 10, 2015)

It totally depends on your type of ROI you are going to calculate, different people with different running businesses have different ways to calculate. For me i have to get my calculation upon knowing the type of business for example taking the case of print advertisement, you could calculate in different ways like:

1) Put a coupon in your print ads and have consumers bring the coupon in to your store for a discount, and count how many people bring in the coupon.

2) Put some copy in your print ad that says something like "bring this ad in for a free gift!" and offer your consumers who come into your store a free gift, and again count how many of the gifts are redeemed.

This works differently depends on the type of business you are running.

Hope this helps


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## Berubeland (Sep 6, 2009)

I would check your projected rental price. I have seen many million dollar houses renting for around $2400. It's a tough market out there. In the last few months, I've done market surveys one in particular up by 401 and Rutherford Road. Gorgeous houses, hot on the resale market, 30 for rent in the immediate area, obviously quite similar because it's a subdivision. 

No someone isn't going to pay you an extra $600 per month for a super duper custom kitchen. 

Renters pay with $$ they earn from their salaries and that has not gone up. Owners pay with borrowed money to buy. 

There's just not that many people making 10K per month take home pay that are looking to rent.


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## sepandee (Aug 14, 2015)

Berubeland said:


> I would check your projected rental price. I have seen many million dollar houses renting for around $2400. It's a tough market out there. In the last few months, I've done market surveys one in particular up by 401 and Rutherford Road. Gorgeous houses, hot on the resale market, 30 for rent in the immediate area, obviously quite similar because it's a subdivision.
> 
> No someone isn't going to pay you an extra $600 per month for a super duper custom kitchen.
> 
> ...


Umm, this was just an example with made-up numbers.


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## GPM (Jan 23, 2015)

sepandee said:


> Umm, this was just an example with made-up numbers.


Funny - with her being a rental expert! Anyhow, berubeland has a blog called landlord rescue. It has an excellent spreadsheet to download and fiddle with there. I think it shows all you need to know when you plug in your numbers and is customizable.


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## peterk (May 16, 2010)

Berubeland said:


> I have seen many million dollar houses renting for around $2400. It's a tough market out there.


That is insane! Some people are nuts...


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## Durise (May 16, 2016)

Really funny. I think so because people who come here for discussion hasn't enough time to calculate. And your data is so large that it take a long time to solve.


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## Xoron (Jun 22, 2010)

sepandee said:


> Umm, this was just an example with made-up numbers.


Yeah, you should listen to Berubeland. She knows her stuff when it comes to renting in the Toronto area.


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