Learn ROI to Make More Money from Your Investments!

A way to learn ROI a little better is to look at examples in more realistic and larger terms. You want to be wealthy, so you want to think in larger terms as it is, and you can't get much larger or realistic than real estate as an example.

In real estate, there are several ways to invest in order to make a lot of money. This is why you want to learn ROI! One way is to buy a property and sell that property for a profit with a quick turnaround. Well, properties don't come cheap and not everyone has a lot of money to spend on an investment that large. Thus the reason for a mortgage loan or other people's money.

So, what happens when you initially buy a property? Do you pay cash for the property, say $200,000? Of course not. No, you use a form of leverage called borrowing other people's money, in most cases, the other people being a bank, financial institution, or a private investor that provides the money for the loan.

Remember, ROI = profit/personal investment! Your personal investment means the amount of money that comes out of your own pocket or the initial investment made out of your own pocket plus the total interest and loan payments paid on the borrowed money.

Here is the rest of the example to help learn ROI. If you turn around and sell that house you bought for $200,000 in a year for $300,000, yes, you would make less than $100,000 profit since you have to pay back some interest and payments on the loan, but your actual return on investment is very high. In that year, say you paid no money down, paid $12,000 in interest for the year, and paid $6,900 in principle loan payments for the year while you were waiting to sell the property. You total out of pocket investment is $18,900. The realized profits from this property purchase are $81,100. Your return on investment is 429 percent.

In the example, the original $200,000 is not figured in as your personal or out of pocket investment because you borrowed that money. That amount was simply applied to the loan to pay it off and you kept the profits.

Do you see where I’m coming from with this. That $200,000 was never yours to begin with and you only paid back a small portion of it. Subtract the interest you paid back from your profits and divide that by your total investment, and you have just learned how to use Other People’s Money as leverage for you, even if you didn't pay anything down on the property!

As you learn ROI a little more, you will see the importance of using debt to your advantage. If you had paid $200,000 cash for the home and turned around in a year an received $300,000 for it, you made a profit of $100,000. But, your return on investment was only 50 percent because you put more money into the investment.

Debt can be a wonderful thing if not abused, as most people throughout the world do on a daily basis. There are things that borrowing money should not be used for or should not be considered as an investment or an asset when you learn ROI. Purchasing an automobile is not an investment unless you are in the business of selling cars for profit.

Purchasing furniture is not buying an asset. Furniture depreciates much too quickly, unless of course you are in a furniture selling business. Same with purchasing a house as your own residence. If you are not planning on selling that home to make more money than you borrowed, it can not be considered an asset for you. It is a liability as you will see as you thoroughly learn ROI.

I hope you see the point I'm trying to build in your mind as you learn ROI. It is encouraged to borrow if that borrowed money is going to help you (or provide leverage for you) purchase assets that will make you money (either on resale or with cash flow). Either form of income will provide a great return on investment over time.

Check out the other money making terms to learn ROI and many more financial terms and principles that will help increase your cash flow and help you make even more money.

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