Another metric utilized by investors is the ROIC (Return on Invested Capital) analysis. In order to reduce risk exposure, it’s important to understand when capital is invested and how quickly that capital is returned to you. The faster those invested funds are returned, the faster those funds can be reinvested and diversified.
ROIC takes into account several different factors including after-tax cashflows, equity appreciation in the property, and positive equity in the reduction of the loan amount. For example, let’s say an investor purchases a building and after the down payment and closing costs ends up investing a total of $1,000,000.
$1,000,000 – total invested capital
$100,000 – Cumulative year 1 after-tax cashflow
$50,000 – Year 1 loan reduction
$100,000 – Year 1 property appreciation
Total ROIC = $250,000 or 25% of invested capital
Being able to calculate when an investment reaches 100% ROIC is an important metric to know so that you understand your risk exposure in an investment. Yet as with any metric, there are downsides and should only be considered as one piece of the analysis pie. ROIC does not represent liquidity in an investment and should be carefully analyzed especially when considering appreciation forecasts.