Return of Capital Vs. Return on Capital
Return of Capital vs. Return on Capital
A Simple Way to EARN INCOME WHILE YOU SLEEP
Capital can be simply defined as money utilized to purchase an asset. Investing is succinctly, the act of purchasing an asset for the purpose of generating income or appreciation. Appreciation of the asset is an increase in the value of the asset over time. When investing involves well thought out planning, education, and action, benefits include additional streams of income, financial freedom, wealth building, and tax benefits. We can all benefit from investing when proven systems are known and applied appropriately; a true vehicle for earning income while sleeping. For purpose of simplicity in this article, we will refer to capital in its monetary form and discuss capital as it pertains to real estate syndications.
With syndications, capital investing refers to raising capital to acquire an asset with the sole focus of improving the profitability of the asset. The profitability of the asset will be shared among the investors and the operators as the management team continues to execute the business plan. Through the process of capital investing, there are two essential ways of earning a returned value: return of capital and return on capital. Though very similar at a glance and differentiated by a single preposition, both values offer a great distinction relating to maximizing the commitment of capital invested.
Return OF capital is a payment rendered to an investor reflecting a portion of the principal invested or a return of the initial amount invested. Return of capital works by allowing the initial capital invested (principal) to generate returns. When a portion of the capital is returned to the investor, the investor receives a “return of capital”. For example, if an investor committed $50,000 with a 7% return of capital, the payment rendered to the investor is $3,500. This payment of $3,500 is subtracted from the investor’s initial commitment of $50,000 ($50,000 - $3,500 = $46,500) to calculate the following year’s return on capital. Thus, the investor’s return of capital the following year is $3,255 ($46,500 x 0.07= $3,255). Because return of capital is not considered income, the payments are not considered taxable. Income is only taxable after there is a profit made on the initial amount invested (adjusted cost base is greater than zero). Though complicated in nature the cost basis is considered the cost of the initial asset. The profit achieved from the asset, minus the cost of the initial asset, is the taxable amount
Return of capital is typically allocated in distributions and may take several years to return to investors. The return of capital is usually returned in its entirety during the sale or refinance of a real estate asset. Benefits of return of capital include receipt of monthly cash flow, thus passive income, deferment of tax liabilities, and the ability to leverage interest versus taxes on money invested.
Return ON capital is taxable income rendered to an investor monthly, quarterly, or yearly. As an example, if an investor committed to investing $50,000 and received a %7 return annually, then the return on capital is 7%, yielding a corresponding payment of $3,500 (0.07 x $50,000). The following year’s return on capital would yield the same return of $3,500. Note the investor’s return on capital is not subtracted from the initial investment or reduced, thus, the payment rendered year after the year remains consistent. Return on capital can be viewed as a way to determine how an investor’s commitment yields healthy profits. Benefits of return on capital include higher returns, cash flow, passive income, and consistent payment on year after year returns.
Return OF capital and return ON capital are both strategies utilized in investing. Determining which is best requires a further look into individualized financial goals. If an investor is looking for tax advantages, return of capital may very a viable strategy. However, if the strategy is to maximize returns in a short time frame, then return on capital may be the viable strategy. Irrespective, of the strategy utilized, both return of capital and return on capital are both ways to create financial freedom, wealth building, and earn income while sleeping.
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Investment Risk: All investments carry the risk of loss. Historical returns are provided for informational purposes only and are not indicative of future results or projections for active investments.Qualified Statements: All statements related to any past or current offering by Cramlet Capital or its subsidiaries, or affiliates are expressly qualified by and subject to the applicable offering document(s), including all information, disclosures, and disclaimers contained therein. No Professional Advice: The content within these articles, emails, and events is not intended to provide, nor should it be construed as providing, tax, investment, or legal advice. You should consult your own professional advisors before making any decisions.General Communication Notice: These articles and emails are for informational purposes only. If you received this email in error or no longer wish to receive such communications, please notify us immediately or use the provided unsubscribe link.
