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Does anyone know the average return on investment property?

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Industry Observer

There are obviously a lot of residential real estate professionals who work with investors.  I have helped a few folks who called themselves investors find property to buy.  The expectations of investors seem as varied as the property they choose.  But there has to be a consensus of what constitutes a good investment vs. a bad one. 

Like most business ventures, I suppose the first goal is to not lose money.  Break even and you live to lose another day, or maybe even win.  But, what is the definition of win?  Are you a winner if your return is more than another investor's?  Are you a winner if your return is greater than the DOW 30 or the S&P 500?  Would it be fair to calculate the leveraged return on a financed real estate investment against an equally leveraged equities investment?  I'm hoping that there's somebody out there in AR World who can offer a little insight.

Perhaps the most basic way to evaluate a return comparison is to assume that the investment is all cash, and that cash could have been deployed to any of a number of investment opportunities.  Any thoughts?

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 Mike Carlier  Lakeville, MN

 

612-916-3033

 

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William Feela
WHISPERING PINES REALTY - North Branch, MN
Realtor, Whispering Pines Realty 651-674-5999 No.

We bought a townhome with cash 2 years ago.  got a great renter and We easily see a 7% return.  (Would have been more except for some "chosen" upgrades.

Our other investments draw 3-4% depending on the market and other issues

Apr 07, 2013 06:12 AM
Mike Carlier
Lakeville, MN
More opinions than you want to hear about.

Bill, the S&P500 is up just under 17% over two years .  Would it be fair to compare real estate returns to the S&P?  There are some publically traded REIT's that have dividend yields in the 4% to 7% range.  Those are the brick and mortar variety REITs, not the mortgage ones that pay out double digit dividends with substantial risk.

Apr 07, 2013 07:07 AM
Yoni Miller
Advanced Commission - Boca Raton, FL

Mike,

I am quite new to the real estate investment industry but what I have learned so far is that the big returns in real estate are the appreciation. Its important to have a good ROI on a yearly basis because you are most likely going to have to spend money every year to fix the place up and deal with other surprises that shrink your wallet.

The real money for residential real estate investment seems to be the appreciation. The amount the property goes up in value every year. You may earn a 10% ROI a year on the rent, but it really comes down to what you sell the property for. That's really why they say "Location! Location! Location!". Properties in better location tend to go up in value, while things in bad locations tend to not go up in value or go up too slowly. 

I hope this helps a little. 

Apr 07, 2013 07:52 AM
Mike Carlier
Lakeville, MN
More opinions than you want to hear about.

Yoni, thanks for your comments.  It's hard to recommend investment real estate based on possible appreciation.  Ten years ago, many folks were buying real estate for the end game, selling at a big profit.  That hasn't worked out very well though.  It would appear that there are other investments that may be more predictable and profitable than real estate.  Although we're on the upswing now, it's a gamble to try to predict how big and for how long it will last.

Do you think 10% ROI is a reasonable income target without leverage?

 

Apr 07, 2013 11:50 PM
Yoni Miller
Advanced Commission - Boca Raton, FL

Mike, it really depends on each deal. In this market I would pay close attention (if its a townhouse) to the HOA. Look at the HOA's financial and make sure they are good. If they have high vacancies and no cash on hand they are most likely going to have to raise HOA fees (which means you will have to pay more on a monthly basis). 

Another big factor is a mortgage if you have one on the investment property. 

Apr 12, 2013 01:28 PM
Mike Carlier
Lakeville, MN
More opinions than you want to hear about.

Yoni, good point.  All HOA fees are not created equal.  The financial health of a HOA is extremely important, regardless of whether a buyer is a consumer or an investor.  Although a mortgage means that there will be an expense, the leverage created through the financing may actually increase the return on the investor's actual cash outlay.   

Apr 13, 2013 10:05 PM
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