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August 18th, 2017, 01:48 PM  #1 
Newbie Joined: Sep 2016 From: Florida Posts: 17 Thanks: 0  How to calculate return on investment if the money is borrowed?
So I'm trying to do some business math. It is easy to calculate return on investment (ROI) if I am paying cash. Let's say that I spend 202,750.26 in cash to flip a house (this is for the initial purchase, labor, etc.) and I end up profiting 38,341.89. This is easy. I take the final amount (202750.26 + 38341.89 = 241,092.15) and divide that by the initial amount of cash I put into the project (202,750.26). This gives me appr. 1.189. I then subtract 1 and multiply by the amount of time that it took. If it took 4 months, then I multiply by 12/4 = 3. This gives me a ROI of appr. .567 or 56.7%. Now things get confusing if I am borrowing money to do this. Let's say that I borrowed the initial 202,750.26. Now, I have zero of my cash in. So does this give me a "dividebyzero" error when trying to calculate ROI because I didn't actually invest anything other than other people's money? Is this just something really obvious that I'm overthinking? 
August 18th, 2017, 02:46 PM  #2 
Member Joined: Jan 2017 From: California Posts: 80 Thanks: 8 
Your return would be infinite since you did not invest any of your own money. Pretty much what Wall Street punks do.
Last edited by skipjack; August 18th, 2017 at 04:31 PM. 
August 18th, 2017, 04:25 PM  #3 
Senior Member Joined: May 2016 From: USA Posts: 1,038 Thanks: 423 
An economist would say that your return is 56.7% annualized. The reason is that you invested 202,750.26 of your capacity to invest. Whether you do so by investing cash or reducing your borrowing capacity makes no difference: that is the amount of your net worth at risk.

August 18th, 2017, 04:54 PM  #4  
Newbie Joined: Sep 2016 From: Florida Posts: 17 Thanks: 0  Quote:
But is there any way to analyze these infinities mathematically? I am aware of the fact that not all infinities equal each other. It would obviously make business sense to take out money at 8% rather than 18%. In both cases, my ROI would be infinity. Or perhaps I should be measuring in terms of earnings/year instead of ROI?  
August 18th, 2017, 05:22 PM  #5 
Global Moderator Joined: Dec 2006 Posts: 19,054 Thanks: 1618 
How do you borrow \$202,750.26 without having to pay interest on that loan?

August 18th, 2017, 05:54 PM  #6 
Newbie Joined: Sep 2016 From: Florida Posts: 17 Thanks: 0  
August 18th, 2017, 06:05 PM  #7 
Senior Member Joined: May 2016 From: USA Posts: 1,038 Thanks: 423  That is not the point. In terms of opportunity cost, whatever you borrow is a reduction in your aggregate capacity to borrow and so in your aggregate capacity to invest. Your capacity to invest is reduced whether you use cash or whether you use a credit line from a bank. You are mixing up the profitability of the investment with the financing of the investment. 
August 18th, 2017, 06:24 PM  #8  
Newbie Joined: Sep 2016 From: Florida Posts: 17 Thanks: 0  Quote:
The profitability is easy to measure. That is in terms of dollars and how long it took me to get those dollars. I am just wondering if there is any way to measure ROI as a percentage if the money is borrowed. But I guess this is kind of pointless since it is money I'm trying to make, not % signs. In other words, I'm not going to go to the bank and deposit a % sign.  
August 18th, 2017, 09:32 PM  #9  
Newbie Joined: Sep 2016 From: Florida Posts: 17 Thanks: 0  Quote:
So first I need to quantify how much I can borrow.  

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