Is there such a thing as infinite ROI?

[virgo]

Hiya

So this question has been bugging me:

Say your IP

Cost 300,000

Deposit 30,000 (own money)

Closing costs 15,000 (capitalised)

Annual interest costs (at 5%) 15750 (incl closing costs ie 0.05*315K)
Annual net rents 20,400

ROI of your own money=(20400-15750)/30000 =15.5% (i am talking ROI not yield here)

Say you decide to plonk a granny flat and bank happily gives you total to build 100K AND it brings in net rent 350 per week.

QUESTION: since you did not bring in your own funds to the table for building this granny flat; and net cash flow is positive, does it mean ROI for this granny flat is infinite??

Where is the kink in me calculation? i ask myself

 

[Propertunity]

Virgo, to borrow a phrase from Paul Keating, "You are a feral abacus".

I suppose in theory, if you are bringing no money of your own to the transaction, then the ROI is ∞, yes.

 

[Peter_Tersteeg]

You put money in for the original purchase, thus the ROI on the total investment is not infinite.

 

[virgo]

Juicy

You put money in for the original purchase, thus the ROI on the total investment is not infinite.

HI PT Bear

So in your opinion, what should be the ROI?

 

[alexlee]

The ROI on the combined deal = 20400 - 15750 + 18200 - 5000 = 17,850 / 30,000 = 59.5%.

 

[virgo]

Semantics

Errr....is that good or bad???

 

[alexlee]

ROI only works if you're comparing it to something. So whatever the ROI is, it's good if it's higher than the alternatives, and bad if it's lower than the alternatives.

You're just looking at this in isolation so the ROI is irrelevant.

 

[virgo]

Good or bad?

Hi Alex


AH...good old Financial Management 101

But say you compare against bank deposit rates?

Or is that not apples vs apples...

 

[Ausprop]

Or is that not apples vs apples...

certainly not... look at what happened in the GFC with highly leveraged property trusts vs bank deposit funds.

I think you are looking at COCR more than ROI?

 

[virgo]

Cocr

Hiya

I assume her the COCR is the same as ROI as i did not take into account any capital gain ; just pure cashflows....

Or i am missing something?

 

[Ausprop]

well if you ignore the house, the $100k granny flat is your investment, 100% debt funded. Your cash component is nil

 

[tobe]

ROI is only one of many acronyms that need to be considered.

LVR, DSR, ETC

LOL.

For instance a ROI of googlepercent isnt any good if the property is currently negatively geared and you lose your job, or if the LVR is 50%, then obviously the oportunity cost of that equity is wasted.

 

[locko24]

The ROI on the gf is infinite. On the overall property it is not.

Yeah, what does LOL mean?

 

[virgo]

ROI is only one of many acronyms that need to be considered.

LVR, DSR, ETC

LOL.

For instance a ROI of googlepercent isnt any good if the property is currently negatively geared and you lose your job, or if the LVR is 50%, then obviously the oportunity cost of that equity is wasted.

Hi Tobe

Do not understand your response
If you look at the numbers (which are real btw ), you will see that they are postively geared and the LVR is 90%....

 

[Mr. Fabulous]

The ROI on the gf is infinite.

I think you'll find lots of guys who strongly disagree with that point of view.

 

[MikeR]

QUESTION: since you did not bring in your own funds to the table for building this granny flat; and net cash flow is positive, does it mean ROI for this granny flat is infinite??

Not sure why you are seeking to calculate a "Return on Investment" given you have determined that you are not making an "Investment" ???

The positive cash flow achieved is a return on the debt funding used which I guess can be seen as a premium for the risk in the whole exercise??

 

[FelixL]

Its funny I just had similar debate with wife regarding our new purchase (neutral geared borrowed using existing IP equity). The conclusion was to look at the ROI of both the original and the new

Comparing to shares/bonds/term deposit is apple to apple, assuming the base capital is roughly equal. For example, you got $30000 to return 59% through leveraging property, much better than term deposit the same money for 5%. However if you have 1mil in term deposit its not comparable since you can't neccesarily replicate the same strategy with that amount of cash (borrow 10mil)

 

[Aaron_C]

Comparing to shares/bonds/term deposit is apple to apple, assuming the base capital is roughly equal. For example, you got $30000 to return 59% through leveraging property, much better than term deposit the same money for 5%. However if you have 1mil in term deposit its not comparable since you can't neccesarily replicate the same strategy with that amount of cash (borrow 10mil)

Apart from the RoI - you have to understand there is a law of diminishing returns as investment amount goes up. It is easier to turn $100,000 into $200,000 than it is to turn $1m into $2m. However, a 100% RoI on $100,000 is insignificant compared to a smaller RoI of 30% on $1m. This is why the big end of town struggles to get massive returns despite having large sums of cash.

 

[locko24]

I think you'll find lots of guys who strongly disagree with that point of view.

He's spent none of his money.
What's the profit? $100 per week?
100/0= infinity

 

[boods99]

He's spent none of his money.
What's the profit? $100 per week?
100/0= infinity

PLEASE. DO. NOT. DIVIDE. SOMETHING. BY. ZERO. ON. A. PUBLIC. FORUM.

Bloody sink holes will open up everywhere...