Your New Friend - Rate of Return

The All Important Rate of Return

The key metric that you must become absolutely cozy with in the game of cash flow and assets is the rate of return. If you invest $10,000 in a duplex that generates $1,000 a year in cash flow after property management fees, vacancy, repairs, maintenance, lawn care, insurance, taxes and mortgage payment, then your rate of return is 10%. A similar property with a rate of return of 25%, everything else being equal, would be a superior investment. If you did not understand rate of return, then you would not be able to conduct this analysis. Rate of return will become your partner in the business of financial independence.

Some other examples of Rate of Return

· You buy 100 shares of MSFT for $2,800 and sell a one month call option against it for a total premium of $140. This is a monthly return of 5%. Annualized it is 60%.

· You buy an ETF that has a 7% dividend yield. This dividend yield is your annual rate of return.

· You write a book, self-publish and market it. Total costs are $5,000 and the book delivers $500 a month in cash flow. Your yearly rate of return is 120%.

You can see that once you enter the game of cash flow and assets, you will quickly start establishing personal hurdle rates. Why invest in something yielding 7% when you can get 50%? Perhaps risk of the investment will come into play but as you get comfortable with certain investments, you may take a hard look at inferior rates of return.