ROI is the bread and butter of sales. It is the figure that will show whether the time and effort spent has been really worth it. Maybe, it has been a while, and your ROI is stuck and sliding downwards instead of up. There can be many reasons for a stagnant ROI, and I’m here to show you how you can resolve them. Keep reading to find out how to implement effective methods for maximizing your ROI.
What Is ROI?
In simple terms, ROI can be defined as the Return On Investment. Once costs are taken into account, it is the final profit that you end up with. The final figure is shown as a percentage of total costs. ROI is a measure of how effective your investment is, and it also shows efficiency over the long-run. Ideally, any real estate company or individual will want to ensure that their ROI is steadily increasing rather than decreasing or remaining at the same level. Everybody wants to see their return on investment increase, and it should be your obsession to make sure this figure is as it can be.
Return on Investment (ROI) = [(Total Amount – Total Costs) / (Total Cost)] * 100
What Is The ROI Formula?
Above we mapped out the formula used to calculate ROI, and many of you will know what this means, as well as, how to calculate it yourself. For those who need a little brushing up, we’ve made a simple explanation for the ROI formula:
Return on Investments (ROI) is equal to the total amount received less than the total costs of the deal, divided by the total cost. This will return a figure that will be multiplied by 100 to convert it into a percent. Let’s see one live example.
Mike is acquiring a new property and would like to determine what his potential ROI would be if he decides to close the deal and make future plans for it. Mike has taken the proper steps to collect information on the property and understands the risks involved with acquiring this property. He’s contacted the owner and has discussed pricing. The seller wants $3.2 million for the property. In order to find and transact on the deal, Mike spent $10,000 using 1PropertyMarket.
Mike also spent another $5,000 to create a contract, and find a potential investor for acquiring the property for a new commercial endeavor. Mike knows how much he has to give for the property, and what the going rate is. Mike agrees to do business with the investor for $3.8 million. It’s clear that Mike made a profit of $500k, but what is his ROI? Plug it into our equation and watch what happens:
Total Amount = $500,000
Total Cost = 10,000+5,000 = $15,000
ROI = [(500,000-15,000)/(15,000)] * 100 = 3,233.33%
This means that Mike made a 3,233.33% return on this property, or in other words, $32.33 of each $1 invested in this deal. Mike is probably whistling a nice tune in celebration.
Correctly Measuring ROI
We measure ROI with the dollar. For example, let’s say you have a marketing company. Your return on investment will be the amount you make for every dollar you put in. Let’s say your current ROI is $4.55 for every $1 dollar investment, and you want to increase this figure. Increasing your marketing efforts, such as increasing your mailing efforts, will not increase ROI. You would continue to see the same $4.55 return on each $1 you spend. There is growth there, but it is directly correlated to action, so the percent will not change. Rather, it can be increased through optimizing systems. Figures such as your average deal size, average profit margin, and conversion rate will all contribute to ROI. If you boost your conversion rate and profit margins, you can start to increase your ROI.
Below, are some of the most common reasons why your ROI is remaining stagnant. Luckily, they can be fixed by dealing with the root causes.
1. Inefficiencies In Your ROI
The best real estate teams and individuals involved in the industry are those who have the ability to set up systems and to see how these systems can be made more efficient. They are always looking to optimize and scale. With some people, there is a tendency to lay back and relax on their laurels. The danger of stepping back is that you miss out on the potential to really shoot up your ROI, and this may mean that you miss out on opportunities to improve your profits in the long-run. Therefore, a declining or stagnant ROI figure can indicate that your systems are not as efficient as they could be.
The solution to this should be fairly obvious to you, but it is not as easy to implement. Systems and organizations take time to formulate, and there is a trial and error involved. What I can suggest is that you should always be looking to improve your systems, sales funnels, and the way that your organization is set up. One way is to shift to more efficient methods of lead generation. For example, you can move from direct mailing to 1PropertyMarket, which brings you pre-qualified leads. The ROI for a campaign on 1PropertyMarket can be up to 3 times higher, which is far more efficient. This is the core of your business, and you should give it the effort and time that it needs. Once you tweak these inefficiencies, you will see a long-term boost in ROI.
2. Lack Of Knowledge About ROI
A simple lack of knowledge can hurt any business. It is vital to know which things will boost ROI and which behaviors will lead to a stagnant ROI. Luckily, knowledge and experience can be gained on the job. You don’t need a degree or any special training to optimize your real estate business. We mentioned ROI, and one mistake that newbies often make is setting their expectations too high. A ‘good’ ROI will depend on many factors, and it is important that you have the right knowledge of what these are so that you can set a realistic ROI. Factors such as investment location, property type conditions, and the market can all play a role. So before jumping in, it is vital that you know these inside out. Or, if you don’t, it is important that you have a reliable team besides you that can have the best understanding of these factors.
It is obvious that a key reason for low a ROI is a simple lack of knowledge. This can mean that a company or individual simply doesn’t know what their return on investment should be. You can alleviate this by taking the time out to make sure that you understand all of the elements involved, and that you surround yourself with professionals who have the inside track. Use our methodology above to ensure that you have an accurate ROI figure. Know your math and get a good understanding of these figures. Measure every single step, and be sure to understand the underlying mechanisms involved. A steady increase in ROI is what will truly grow your business, so don’t get caught up in big-money deals. They will only be temporary if you don’t use the funds to optimize your systems.
3. Not Understanding Your Asset Class For ROI
Prices and rents can increase sharply in local areas, even without pressures from the national market. One way to increase ROI is to have the best knowledge of pricing when it comes to housing costs and rents. Rents tend to rise faster than costs, which means you should keep this in mind as a way of boosting ROI in the long-term. Additionally, you should keep your eyes focused on what is moving your asset class specifically. Ignore the outside noise, and instead become the expert of your bread and butter. The markets tend to move differently for asset classes and different property types.
It is common for many real estate investors to get involved in exciting opportunities without having enough details of what is pushing the local market. You can alleviate this by surrounding yourself with local experts or by putting in the time to get to know the market properly. This will pay off since it will mean you can make more informed decisions about costs and pricing to ultimately boost your ROI on a yearly basis.
4. Lack of Patience When Planning Investments For ROI Calculations
Aside from knowledge, you also need patience at the right times. Sometimes the market will be a waiting game, and rushing in often means you are left with lower profits and, in some cases, a loss. A lack of patience often leads to inferior investment decisions, and these can build over time to really hurt your ROI.
The solution may seem as easy as having more patience. But, in reality, patience can be hard to come by. Being mindful of the market, and reassuring yourself that the right opportunities will come, will put you in a much better position. Remember that you don’t need to force things and that it is better to find one suitable property than to find multiple properties that are less than ideal. This steady approach will eventually lead to a higher ROI in the long-run.
Improving ROI with Gained Knowledge
You will now have a much better idea of how to improve your ROI. All of these actionable tips can be applied today, but you must do your best to make them a habit. Remember that this is a long-term game, and the steps you make today will benefit your company in the months and years to come. By being consistent, you can ensure that your ROI continues to grow at healthy levels.