ROR - RETURN ON TOTAL CAPITAL

ROR, or the Return on Total Capital  measures the income return of an income producing property with the implicit assumption that there is no debt.  It is equivalent actually to the overall capitalization rate or “free and clear” rate of return, as it is calculated as the ratio of NOI over purchase price or total capital invested. 

 

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If total capital invested is used though, it could be slightly different than the overall capitalization rate or income return, where the denominator is the purchase price.  Total capital invested can be higher than the purchase price, as it may include other acquisition and pre-acquisition costs, such as notary and other governmental fees associated with transfer of ownership, legal due diligence, market studies, feasibility studies, engineering and environment studies, etc. 

 

Return on Total Capital = NOI / Total Capital Invested   (8)

 

NOI                                         = $100,000

Total Capital Invested         = $ 1,050,000

 

Return on Total Capital = 100,000 / 1,050,000 = 0.0952 or 9.52%

 

We used here the total invested capital, which is on purpose assumed greater than the purchase price of $1,000,000 to demonstrate that Return on Total Capital can be different than the overall capitalization rate or income return.

This is an excerpt from the e-book Real Estate Investment Mathematics