What is a reasonable ROI?

[Peter O.]

This is my first post here, and I am just starting out, trying to learn, and hoping to make my first purchase, so please be patient if I am asking very basic questions. I just analyzed a property using the Bigger Pockets rental property calculator. I get a CoC ROI of 6.09, and a 5-year annualized return of 15.44. Now, I know that historic stock-market performance is about 7%.

My first question is, which number should I be looking at? Should I be comparing the 7% I will likely get by investing in an index fund versus the 6.09% CoC ROI, or the 15.44% 5-year annualized?

My second question is, are these good numbers? What would you consider to be a minimum return before you buy? After all, any purchase would require a lot of work, both before and after purchase, so I would like to be making more than the stock market to make it worth it.

Thank you in advance for your help. 

[Andrew Eherts]

Hi Peter!

You raise some pretty nuanced questions. Comparing real estate returns to the stock market is pretty tough unless you adjust them to reflect risk adjusted returns. Historically, real estate is less volatile than the stock market, and you get more return per unit of risk you take (depending on what you invest in!). That's not a number that can be calculated easily though...

CoC is better related to coupon or dividend investments. Try getting a bond that pays 6%+ these days! I'd say it's a win, but what is a "good" return is relative to your goals. EPS is also very low as Price/Earnings keeps skyrocketing. 15% annualized is pretty nice--does that include a sale?

My current criteria is a 15% internal rate of return and a 6-9% CoC, which accounts for the time-value of money. It looks pretty similar to what you have underwritten in your post.