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..