Return on Investment

What it is

ROI is the overall financial return on the money you put into a deal. Different from cash on cash, which only measures cash flow relative to cash in. ROI stacks all four wealth engines together: cash flow, tenant buydown (principal getting paid down by rent), market appreciation, and forced appreciation from the rehab, plus the tax shelter from depreciation.

On flips the ROI is simpler: profit divided by cash invested, divided by time held.

Why it matters

If you only look at cash flow, rentals look marginal. On the 16-property portfolio Ross walked through, cash flow after debt service was $7K a year. That’s terrible. Except it completely misses the point. The real ROI on that portfolio is “the equity that grows every year while the tenant pays the mortgage down” plus appreciation on the underlying asset plus the depreciation shield.

“A break-even deal today is a big money deal in 20 years. A negative deal is never worth it.” Because “rents go up 3 to 5 percent per year on average over the last 30 years. My principal and interest on a 30-year fixed mortgage does not move at all.”

Real estate’s power is the stack: the same dollar is working in four different ways simultaneously. ROI is the metric that captures all four.

How it shows up

For flips, simple: profit minus costs divided by cash in. A $30K profit on $15K cash invested over six months is a 200% return per turn, roughly 400% annualized. Good number in isolation. Bad number compared to what that same $15K does sitting in a rental for 20 years.

For rentals, you run a multi-year model. Year-one cash flow. Cumulative rent collected. Principal paid down by tenants (this is real equity you’re compounding). Estimated appreciation at 3-5% annually. Depreciation shield against your tax bill. Divide total return by initial cash invested, annualized. That’s true ROI.

Watch out for Roi traps too. “In the case of getting a house to the market those last few percentages matter.” Ross generally believes in the 80/20 principle: “that last 20% is got a terrible ROI on it.” But on a flip listing, the last 5% of finish matters to the buyer even if it feels like a bad use of your time. Different ROI rules apply to different stages of the work.

And the ROI of cash sitting idle is zero. Every dollar parked in an all-cash flip is a dollar not earning principal paydown, appreciation, and tax shelter somewhere else. That’s why Ross runs his capital through cash recycling instead of letting it sit in one finished house.

Related

cash on cash, cap rate, wealth engines, market appreciation, forced appreciation, depreciation, tenant buydown, cash recycling