Return on Equity, Leverage & Profit Measures
Profit measures calculated and displayed on the LDM Input Page include Gross Profit Margin, Profit Margin Before Tax and Average Return on Equity. The measure required to attract capital to a given development project vary from investor to investor. One may be satisfied with a gross profit margin before tax of 20 percent while another may require 30 percent, etc.
The views of the LDM input page below illustrate average annual return of equity measures with and without seller financing. In Scenario#1 the seller has agreed to finance $300,000 at an interest rate of 4 percent for a term of five years (60 months) while the seller does not provide owner financing in Scenario #2.
The profit is higher in Scenario #2 because there is no interest cost for seller financing. However the average return on equity is higher in Scenario #1 because the developer/investor has less money in the project. This demonstrates the power of leverage.
Seller Financing - Scenario #1
Seller Financing - Scenario #2
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Land Development Model, LLC
302 West Lafayette Road
Medina, OH 44256