The Strategy of ROI Method

            The ROI method offers a helpful strategy for producing wealth. Wealth is not riches, in spite of what the dictionary says, because riches cause you to continue to do to accumulate. Wealth on the other hand is money you’ll receive even if you don’t do a thing. I am not saying that to accumulate wealth you will not have to work. I am saying that wealth is future payment for work done in the past. Make no mistake wealth can be forfeited, stolen or lost. The ROI’s method is a two step process:

• Purchase properties at discounted rate
• Make the properties value increase before financing it

There are two number you must get right for this system to pan out for you:

• The amount of money you’ve put into obtaining the property
• The amount the property is worth once the rehab is finished

I know of a person though we have not meet who has violated a fundamental rule of real estate investing. Do no harm.

He bought a property in the lower income part of his city and began his improvements. In my opinion he used the wrong materials in some crucial areas. In order to change this out would be costly but should I assume the cost of his error. He also hasn’t finished the rehab, but he has purchased the material to do so, although using them would produce the house he wanted. He is asking for full what he feels is value of the property once the rehab is complete but is willing to negotiate the cost to complete it. Purchasing the materials is not where the value lies. The value is in what is done with the materials. As a contractor I go to my suppliers regularly to purchase materials I need for my projects. My supplies have purchased those materials, using his logic I should allow them to share my profits for what potential I see in their materials. For an example let’s say I purchased a sheet of hardwood plywood and some one by to rip down to the sizes I need to build a cabinet. After all is said and done, I have 20 dollars invested in the wood, but one the bathrooms vanity is completed I sell it for two hundred dollars including the installation. How has what I’ve done with the materials effected the amount of capital I owe my supplier? The suppler may at first think it would be nice if it worked like that until he realizes he didn’t mill the lumber, the mill might think that would be sweet until he realizes he didn’t fall the lumber and the list continues to grow.  

When you purchase the properties correctly, and you increase your properties value before you finance it you have been successful using the ROI method. However, to get these number right you must master the three components of them.

• How much you purchase your property for
• How much your rehab cost
• What is the finished appraised value

Of these components you have the most control over the amount you purchase your property for. This is the reason that many ROI investors believe the purchase price of the property to be the most important factor in determining weather or not you’ve made a good deal or not.

Never-the-less there are some things you can improve upon to make you opportunities to achieve a good deal improve. T. Jefferson said he also believed in luck, “I’m a greater believer in luck, and I find the harder I work the more I have of it.”.  The more task you are able to accomplish the more the more problems you’ll be able to solve.

Good deals come from distressed situations; great deals come from being able to provide solutions to multiple issues which the property owner face. You should be willing to pay up to the amount your numbers tell you the property is worth, but do not pay for the potential you see in the property.

Note: Images on this blog site are from a free source or taken by the author. No image or group of photos is intended to represent the people the author serves. The author does not care about Race (that is a politically correct term that he does not like because we are all of the same Race, the Human Race. He prefers the term ethnicity, color, religion, sex, gender, marital status, disability, genetic information, national origin, source of income, Veteran or military status, ancestry, citizenship, primary language or immigration status.) He is a service provider for all people. We will all rise together when we band together and help one another. Joseph Erwin is a Real Estate Broker, DRE # O2131799, and a CA general contractor # B 696662. He’s a member of the CRMLS and The East Valley Association of Realtors located in the Inland Empire region of Southern California.