Return on Investment Calculation

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Keller Williams Ottawa Realty Ltd.
Brokerage, Independently Owned
and Operated.
610 Bronson Avenue
Ottawa, Ontario K1S 4E6

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Return on Investment Calculation

Frequently you will see income and expense statements that do not include "vacancy & bad debt", "maintenance", or "management" costs. Here is a simple and effective way to ensure accuracy.

Start with G.O.I. "Gross Operating Income"

Less Vacancy and Bad Debts (calculate 2% - 4%)

Equals "Effective Gross Income" (you now have the true income & a starting point)

Next deduct expenses. For those missing expenses plan approximately:

Management = 4% to 8% (The 4% manager may be the most expensive!)
Maintenance = 2% to 5% (dependent on age and condition of property)

Deduct all other expenses to arrive at the N.O.I. or "Net Operating Income".

Deduct A.D.S 'Annual Debt Service" (the mortgage, principal & interest)

Result is "Annual Cash Flow"

To determine your R.O.I. "Return On Investment", divide the cash flow by your investment (down payment + incidentals) For example if your annual cash flow is $4,000 and you have $50,000 invested, then you are making an 8% return on your money.

In an Agreement of Purchase and Sale (and among many other prudent measures) obtain from the Seller, proof of income statements (copies of leases, etc.) and copies of expenses (utility bills, tax statement, etc.) to ensure the accuracy of your R.O.I.

See an example calculation of cash flow and return on investment on the next page. It assumes a five plex apartment building sold for $600,000 with the Buyer using a $150,000 down payment (25%) to avoid paying a CMHC insurance charge.

Example Of Cash Flow Calculation

Income
	Annual rental income	$70,000
	Less vacancy & bad debt (4%)	$2,800
	Effective rental income	$67,200	$67,200

	Income from parking	$2,600
	Income from laundry	$2,100
	Total "other" income	$4,700	$4,700
	Gross operating income (GOI)		$71,900
Expenses
	Management (6%)	$4,200
	Property Tax	$7,000
	Insurance	$1,000
	Water/Sewer	$800
	Heat	$600
	Hydro	$600
	Maintenance (5%)	$3,500
	Total Operating Expenses (TOE)	$17,700	$17,700

	Net Operating Income (GOI - TOE)		$54,200
	Less Annual Debt Service (Mortgage Of Principal And Interest, Assume $450,000 @ 5% Amortized Over 25 Years)	$27,000	$27,000

	Annual Cash Flow		$27,200

	Return On Investment ($27,200 / $150,000)		18%

Bruce Johnstone
Lead Sales Representative

Judy Johnstone
Admin, Sales Representative