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Brian of http://geniustypes.com/ shares two more great ways to calculate ROI. Last week we learned about ROI based on equity, but real estate makes you money a variety of ways. Calculate your ROI based on cash flow and add it to ROI based on equity for a more complete idea of what your money's doing.
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Calculating ROI as a Real Estate Investor Part 2 Balance Sheets and Income Statements By: http://geniustypes.com/
Two Types of Financial Statements • Both individuals and pieces of real estate have financial statements • A house’s balance sheet has to do with equity, while a person’s has to do with net worth • A house’s income statement records cash flow, a person’s records money from their job.
How Equity and Cash Flow Impact Personal Finance • The second you buy a house and rehab it, it’s financial statements attach themselves to your own • For example, if the house you buy has $30,000 in equity, your net worth increases by $30,000 • If you property cash flows $300 a month, $300 are added to your personal income
Why You Must Buy Real Estate “Correctly” • A property can positively affect your personal income and balance sheet, but it can also have a negative impact • If you buy a house that’s upside down or has negative cash flow, your net worth and income will decrease • Must buy real estate correctly to see positive affects on ROI
ROI Based on Equity and Cash Flow • If you have $10,000 invested in a property and the equity in the house is $30,000, you have a 300% ROI • But if this house also cash flows $200 a month, that’s $2400 added to your income (24% ROI) • These different ways to calculate ROI create conflicting calculations of return on the same house
Add Them Together! • If you have your ROI based on equity and your ROI based on cash flow add them together! • This is your total ROI (not counting ROI on other ways real estate makes you money like tax advantage) • Remember when you buy a piece of real estate, it’s financial statements attach to your own
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