ROI for Rental Property vs. Other Investments

[Daniel Blake]

Hey BiggerPockets community–

I need help being persuaded to invest in real estate. I've managed my personal assets for quite some time, investing in stocks and bonds mostly, with the occasional foray into other asset classes like gold.

As an investor, any investment I make needs to compete with my other options, i.e. my return on investment must be better than what I'd get with other investments.

When I calculate ROI on a buy-and-hold rental property, I'm not convinced it's an asset class worth investing in, especially considering all the time and stress involved, not to mention the liability risk of being a landlord. Because of this, I would require a much higher expected ROI on a rental property than I could get otherwise. ROI under 15% per year on average, I am not interested in. I'll just invest in more passive asset classes.

When I run the numbers on a potential rental property, assuming I can buy at a slight discount (say 5%), with a standard mortgage, a rent level that generates positive cash flow, and an annual projected appreciation of 4% a year, the projected ROI I'm seeing is modest, like around 10-15%, which does not justify all the headache and risk required investing in real estate. And this 10-15% average annual return is only seen after holding and successfully renting the property for at least 5 years.

And to be clear, the ROI I am using is calculated at sale of the property – total profit divided by total investment, annualized. This to me seems the most pure metric to measure the performance of real estate. And I tried to be as comprehensive in my modeling as possible, including purchase and sale closing costs, the value of tax deductions, management costs, etc.

I know this community is dedicated to investing in real estate specifically, but it's still an investment, and every investment is measured by the profit it can produce and must compete with other options.

What am I not understanding or missing here?

[Ali Boone]

When you calculate the numbers and get that 10-15%, is that with financing or with an all-cash purchase? Let me know on that because that will make a huge difference, but then in the meantime, one thing to know is that there are multiple profit centers on a rental property. You mentioned the first two: cash flow and appreciation, but there are some more, too. (#4 plays into whether you're financing or not):

https://www.biggerpockets.com/...