1. What is Return on Risk-Adjusted Capital (RORAC)?

Definition: RORAC is a financial metric that measures the return on capital while accounting for the risk associated with that capital.

Purpose: It helps real estate investors and financial institutions evaluate the profitability of investments relative to the risk taken.

2. How Does the RORAC Calculator Work?

The calculator uses the formula:

Where:

• \( RORAC \) — Return on risk-adjusted capital (percentage)
• \( R \) — Return (USD)
• \( C \) — Cost (USD)
• \( K_{adj} \) — Risk-adjusted capital (USD)

Explanation: The formula calculates the net return (R - C) as a percentage of the risk-adjusted capital employed.

3. Importance of RORAC in Real Estate

Details: RORAC helps compare different real estate investments by considering both their returns and associated risks, leading to better capital allocation decisions.

4. Using the Calculator

Tips: Enter the return amount, total costs, and risk-adjusted capital (typically the amount at risk in the investment). All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What's considered a good RORAC?
A: This varies by industry and risk tolerance, but generally a RORAC above 15-20% is considered strong in real estate.

Q2: How is risk-adjusted capital determined?
A: It's typically calculated based on the risk profile of the investment, often using statistical models or regulatory capital requirements.

Q3: What's the difference between RORAC and ROE?
A: ROE (Return on Equity) doesn't account for risk, while RORAC adjusts for the riskiness of the capital employed.

Q4: Can RORAC be negative?
A: Yes, if costs exceed returns, resulting in a negative percentage indicating a loss.

Q5: How often should RORAC be calculated?
A: For ongoing projects, quarterly calculations are common. For new investments, calculate before commitment and periodically thereafter.