Return on Investment (ROI) or Return on Cash (ROC)?
June 3, 2010
So what are ROC and ROI
ROC stands for Return on Cash and ROI stands for Return on Investment. But what’s the differenc
You often read at the end of a year about the comparison between the stock market and property prices.
It may say that the stock market has increased 7% and property prices have increased by 5% therefore the stock market has outperformed property prices.
This is your return on investment.
On the face of it this may be true.
However, with property there is the ability to have bank financing whereas the thought of asking your bank manager (or whatever they call them these days) for a loan so you can buy and sell shares is quite laughable.
Borrowing to invest in property has received bad press over the last few years, however, sensible borrowing (otherwise known as gearing) is an option most property investors adopt.
Therefore, if you bought a property for £100k, and borrowed 50% of the value of the property, a 5% increase in investment (£100k) will have increased to £105k – a 5% return on investment. However, the return on cash is 10% ie £5k increase as a percentage of cash invested (£50k).
In my opinion ROC is far more important than ROI.
What do you think?