Apples to Apples
A duplex cash flowing at $5,000 a year on top of a $50,000 investment is providing a 10% rate of return (by the way, rate of return and return on investment are the same damn thing), a superior investment compared to a duplex cash flowing at $7,000 a year on top of a $100,000 investment for a 7% return.
A stock consistently delivering an average 20% return on equity, in Warren Buffet’s opinion, is in essence delivering a 20% rate of return. He claims this return as his. (more on this later.) A dividend stock paying an annual yield of $.70 with an average price of $10 a share is delivering a 7% rate of return. A business with $20,000 in earnings for the year and an initial investment of $100,000 is yielding 20%.
In the world of small business and investing, rate of return (return on investment, same thing) reigns supreme.
Investing From the Business Perspective
To further illustrate rate of return and how it applies across investments including small business, let us step into the shoes of a rental property investor. A true rental property investor evaluates property based on cash flow and the rate of return. The following table details a cash flow analysis of three sample rental properties, a triplex, fourplex and duplex respectively. The combination of a down payment, closing costs and repairs equal the total down payment needed to invest in each of the three properties. These are culled from real deals folks, so don’t accuse me of making up some hokey numbers.
| | 1625 Flanigan | 1717 O'Shea | 1714 O’Brian |
| Number of Units | 3 | 4 | 2 |
| Purchase Price | $ 100,000 | $ 128,304 | $ 97,200 |
| Cash Put In Property | | | |
| Down Payment | $ 20,000 | $ 25,661 | $ 19,440 |
| Closing Costs | $ 200 | $ 500 | $ 500 |
| Repairs | $ 550 | $ 500 | $ 200 |
| Total Cash Put Into Property | $ 20,750 | $ 26,661 | $ 20,140 |
| | | | |
| Monthly CF Analysis | | | |
| Monthly Gross Rental Income | $ 1,275 | $ 1,980 | $ 1,350 |
| Minus Vacancy Loss of 8% | $ 102 | $ 158 | $ 108 |
| Total Income | $ 1,173 | $ 1,822 | $ 1,242 |
| | | | |
| Mo Expenses | | | |
| Property Mgt Fee of 10% | $ 117 | $ 182 | $ 124 |
| Accounting | $ 10 | $ 15 | $ 5 |
| Insurance (hazard) | $ 50 | $ 54 | $ 50 |
| Yard work | $ 15 | $ 20 | $ 15 |
| Repairs and Maintenance | $ 90 | $ 120 | $ 90 |
| Misc. | $ 10 | $ 15 | $ 10 |
| Reserves | $ 20 | $ 20 | $ 15 |
| Taxes (Property) | $ 100 | $ 139 | $ 95 |
| Total Expenses | $ 412 | $ 565 | $ 404 |
| NOI | $ 761 | $ 1,257 | $ 838 |
| Loan Pmt | $ 675 | $ 866 | $ 656 |
| | | | |
| Cash Flow | $ 86 | $ 391 | $ 182 |
| | | | |
| Rate of Return | 5% | 18% | 11% |
Table 1-1
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