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Margin Vs Markup
Margin and Markup are two different ways of calculating profits, and it's important to understand their distinctions:
Let's consider an example using a $100,000 construction job to illustrate the difference between a 20% markup and a 20% margin:
20% Markup: If you have a 20% markup, it means the cost of the construction job is marked up by 20% to determine the final price.
Let's assume the cost of the construction job is $x. Then, the final price would be $x + ($x * 20%) = $100,000 (the sale price).
Solving for $x, we get $x = $100,000 / 1.2 = $83,333.33 (approx.).
So, the cost of the construction job is $83,333.33, and the profit is $16,666.67 (approx.).
20% Margin: If you have a 20% margin, it means the profit makes up 20% of the total revenue.
Let's assume the cost of the construction job is $y. Then, the profit would be 20% of the final price ($100,000 * 20% = $20,000).
So, the cost of the construction job is $100,000 - $20,000 = $80,000.
In summary, with a 20% markup, the cost of the construction job is $83,333.33, and the profit is $16,666.67. With a 20% margin, the cost of the construction job is $80,000, and the profit is $20,000.
When developing buildings, we aim to create a 20-40% margin to ensure a healthy profit and account for potential risks and uncertainties.
In our next deal, we have a stabilized value of roughly $27,729,000 and all-in costs of $20,761,676. To calculate the margin, we can use the following formula:
Margin = (Profit / Revenue) x 100
First, we need to determine the profit: Profit = Revenue - Cost Profit = $27,729,000 - $20,761,676 = $6,967,324
Now, we can calculate the margin: Margin = ($6,967,324 / $27,729,000) x 100 = 25.11% (approx.)
In this deal, we have a margin of approximately 25.11%.
I’ll be sharing this deal next week.
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