What is ROI?

[GeorgeW]

I ran into a friend yesterday who purchased a second home as an investment property. He is renting it, and hopes to make good money. I had cautioned him before about swings in the market, but he was not concerned...

So, with the purchase of his new rental property I asked him, "What is your ROI?" His answer: "What is ROI?" My jaw fell off my face and rolled around on the floor.

Do you often see people purchasing investment properties who are unaware of this basic measurement of investment success?

[HHI Golf Guy]

Return On Investment

Edited: DOH! I thought YOU were asking the question

[Memphis]

Some people are very independant and are going to sell their home, or buy their home, or do that big project on their own; with out help from their friends.

I had a friend and she bought a house to do a flip on. I offered to help her with the general contracting stuff and upgrades as a friend, if she would allow me to list the home when it was done. She refused and did everything on her own. Including hiring the wrong electrician which caused her to fail her inspection and required her to pay a 2nd electrician to come out and do everything all over again. She spent $30k too much on her kitchen, etc, etc, etc.

All this to prove she could do it on her own and to save 2% commission.

some people believe they know the "know" and are going to prove it to themselves.

[aeromit]

Most people are not familiar with the basic measurement of investment success? Other just don't know the terminology.

[GeorgeW]

I personally, would view anyone who purchases "investments" without understanding what ROI is, and why it is important - particularly in Real Estate as a speculator not an investor.

My friend had never even calculated how much money he was getting vs. the mortgage and other costs. He seemed to be looking for capital gains, and to just "flip" the house at some point in the future, with no care as to the costs of the property in the near term.

[jessiesc]

I have noticed this quite a bit lately with the prospects I have been getting.

Granted, they are new to RE Investing so I give them some leeway.

I don't really expect the new investors to know all the calculations for investing, but yes, ROI is basic to any investment strategy.

It's interesting actually, as ROI pertains to ALL business strategies.

Aren't they teaching ROI in basic business anymore?

Personally, while I use ROI in my investment strategy and explain it to my potentials, it is not the primary calculation I use, but it is definately one of the considerations I go through.

I find it interesting that most of the new investors I meet these days, who are attempting to invest in RE have not done their homework.

[Angela Dancisak]

Yes, especially in fast markets. I 've noticed it many times with condo conversions. A person receives a tip on how to make "quick" money and their research falls by the waste side.

[Angela Dancisak]

Angela J. Dancisak

[vtalerico]

WOW! That is some good food for thaught. Being a realtor, I come across these types of people on a daily basis. The difference is, when I have a client that wants to do investement...i advise them and counsel them on what is going to happen, risks, returns, etc. Your friend seems pretty laid back and I would safely assume that he has a very nice security cusion and horible credit? I guess no one told him that the market took a dive back to normalcy and the fast flips are no longer getting 10-20 offers. Then again, it depends what he purchased the property for and what his mortgage is, how much money he invested, and what his plans are (none of which i know and from what you say haha, he is not familiar with any of this iether). Finally, like I was just saying...I see people all the time purchasing investment property that have not one clue about real estate ventures, however most of them do understand the concept of "ROI!" I think I learned this when I was in kindergarden playing blackjack in the cafateria!