The journey of an investor into a different perspective of what makes sense
Investing successfully requires a disciplined investor to go through a vigorous process which requires Energy, time and money. Two which are recoverable and time which is none.
We usually refer to Return on Investments as a return on the capital invested. We rarely see people measuring ROI for what it really is. Let us venture into ROI from another perspective. Let’s call it Mak’s revenue perspective. ROI=ROT+ROE
Return on Investment= Return on time + Return on equity
Let’s take two investments in focus. We will consider two real estate investments while the same formula can be used across investment classes. For simplicity, we will consider that the property has been purchased for cash.
Investment A – Purchase of a luxury managed property serviced and operated by the developer or a third party operator.
Property value 1 million USD.
Rental 70,000 USD
Total costs 20000 USD
Net revenue 50000 USD
ROE is 5%
Investment B – Purchase 5 middle end none managed property, with the option to have a third party managing your property or have the relationship with the tenant handled by you.
Property value of the 5 properties 1 million AED.
Rental 90,000 USD
Total costs 25000 USD
Net revenue 65000 USD
ROE is 6.5%
It is obvious that the net return on equity in investment B is higher than the return of investment A. That said let’s consider the time investment A and investment B may take of you.
Investment A should take you less than 5 hours spread over a year, going over accounts or approving any invoices.
Investment B will take you time to appoint the third party management company, as well as remember you have 5 apartments rather than one. Thus 5 different move in dates, and 5 different move out dates. 5 time higher risk in a cheque bouncing, 5 different tenants, and last but not least 5 times the time to go through accounts and approve invoices. Let’s call the sum of this time 40 hours a year only.
The ROT, if you consider both investments equal in the quality of asset and the future prospects (which usually isn’t the case), is the value of your additional time spent in investment B which equated to a maximum of 1.5%.
If a working week spent a year approximately is worth less than 15000USD then you are in profit.
Many of us lack this kind of time to offer our investments. Our businesses and life styles maybe so demanding for us to be able to afford spending such valuable time.
Here we have another perspective to RETURNS. I hope it helps you make better choices on the right investment for you.
By Makram H. Hani
C.E.O. Arms &McGregor International Realty®
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