How and where to invest money in today’s Covid-19 world is a question that gets asked a lot.
Truth is that you can invest money in property in Australia seemingly through any situation because the government refuses to allow the construction industry to fail.
So if the “where” is property in Australia, the “how” is very important.
When you invest money in real estate, how do you measure your profit return to ensure you are not wasting time (and your money)
There are 3 main points when talking “profit”:
- The same property can have a number of different financial results
- Profit does not equal cash in the bank
- You bank cash, not percentages. Percentage returns can be distorted, cash is cash.
The questions to ask yourself before you invest money in a real estate deal, whether it’s a simple renovation or a multi-dwelling development, are:
- How do I avoid a dud property?
- Base on my available resources, what is a good return for me and how do I measure it?
- How do I assess and effectively manage the ongoing performance of my asset?
It is common in the real estate industry to use ROI or Return on Investment to measure the profitability of a project.
ROI measures a dollar of profit returned per $100 of asset. The limitations of ROI is that we are looking at profit. And as I have already described earlier in the previous blog, “How Do You Go Broke Making a Profit on Paper?”, profit is open to manipulation. (Read 2nd blog here)
Secondly, specific to real estate, we are using total asset price in the formulae to calculate the return. When you invest money in real estate, more often than not, you are borrowing a considerable amount of money to finance the deal.
With ROI, we are not really considering any kind of leverage, instead with ROI, we are spreading the profit over the total amount of the asset including the amount we borrowed. The problem with that is, the amount we borrowed is very relevant to our investment.
Alright! Now that we have discussed the limitations of the most popular measure of profit in real estate investing (and how you can go broke making a paper profit) , let’s move on to how Jason and I measure the profitability of our investments.
We prefer to use CoCR (Cash on Cash Return) instead of ROI.
CoCR measures a dollar of profit returned per $100 of cash invested.
Why do we love CoCR?
Simple! Because cash in the bank is ultimately the clearest and best way to understand how successful your projects are.
When it’s all said and done, cash in the bank is ultimately what matters. Again you cannot buy groceries with paper profit as they say ! Unlike profit, cash is harder to manipulate. It is easy to measure accurately and you don’t need a fancy accounting degree to measure how much cash you get back for ever $100 you put in on a project by project basis.
Investing money in real estate is not for everybody. However what we do here at PPP is turn complex property problems into premium property profits.
If you would like to understand how to invest money in real estate to make the best return possible with all the options and strategies available to property investors, or to better understand how does property investing work in general, book a chat with me using the link below.