Avg ROI expectation

[Heajin Kim]

Hello Guys

I am just starting out and I have no property as of yet.

I have a question about ROI. What % of return should I expect to get?

I was thinking if i can get 10% return on cash purchase deal then I thought that would be good. However, I was going through this forum. It appears that a lot of them are expecting more than 10%.

Can anybody enlighten me what is average return in realty? I am assuming I would able to sell it for at least what I paid for in 10 or 20 years in the future.

Thanks

[Jeff S.]

@Heajin Kim are you talking about return from rental income or appreciation from owning the property and selling down the road?

Most ROI figures are dealing with income.

[James Sinclair]

Heajin, I am also new to real estate investment but have done a quite a bit of study. My opinion is that until you develop your plan including debt to equity, type of property, strategy, and a good macro projection for your area ROI will not be comparable. Say you do a flip with all Hard Money and make a profit your ROI would be infinity but that number does not mean it was a good project.

[Darrin Carey]

ROI is frequently abused to measure returns. Chasing a high ROI gets a lot of people in trouble. It causes people to over-leverage properties, or buy mediocre deals that only need a small down payment, all in pursuit of the highest ROI possible. As @James Sinclair said, a project with no money in it has an infinite return, but it does not mean it was a good project.

@Heajin Kim you said a 10% return on a cash purchase. That is the same as the cap rate (google cap rate if you need to), and would represent a really good return on a single family home. Many single family homes in our area have a 7-8% cap rate. In our area, you can get a better return, however that comes with other costs.

If you are buying exist turnkey rentals, an 7-9% cap rate is good. If you are buying and fixing your own, you can do much better. 12-15%+. Keep in mind, cap rates will vary depending on where you are in the country, and which neighborhood you invest in. For example, there are good deals within 10 miles of my house where the cap rate can vary from 7-15% or more depending on property type, and the neighborhood it is in.

[Heajin Kim]

Thank you and thank you for your inputs. It makes more sense to me now

[Stephanie Dupuis]

Originally posted by Darrin Carey:

ROI is frequently abused to measure returns. Chasing a high ROI gets a lot of people in trouble. It causes people to over-leverage properties, or buy mediocre deals that only need a small down payment, all in pursuit of the highest ROI possible. As @James Sinclair said, a project with no money in it has an infinite return, but it does not mean it was a good project.

@Heajin Kim you said a 10% return on a cash purchase. That is the same as the cap rate (google cap rate if you need to), and would represent a really good return on a single family home. Many single family homes in our area have a 7-8% cap rate. In our area, you can get a better return, however that comes with other costs.

If you are buying exist turnkey rentals, an 7-9% cap rate is good. If you are buying and fixing your own, you can do much better. 12-15%+. Keep in mind, cap rates will vary depending on where you are in the country, and which neighborhood you invest in. For example, there are good deals within 10 miles of my house where the cap rate can vary from 7-15% or more depending on property type, and the neighborhood it is in.

This is a well-stated reply by Darrin. I will settle for a 8% return (which is very low for some ppl on this forum), but...I'm in a location where costs are high, and I'll be purchasing a property in a solid neighborhood, low turnover, solid tenants.

There's more to the equation than return. Because I know my local market very well, I can take many factors into account when looking at the numbers. I'm able to ask myself, "What is my money buying me?"

[Engelo Rumora]

Hi Heajin,

The better class of area the lower the cap rate will be but higher potential for growth.

Personally I like to stick somewhere in the middle but will patiently wait for the right deal to come along before I buy it.

I like to buy run down properties that need rehab. Once rehabbed and tenanted they usually show around 30% net cap's.

Thanks for your time and have a great day.

[Tom Goans]

@Heajin Kim,

A 10 percent return would be too low to get the attention of most seasoned investors, especially active seasoned investors.

Every Investor is Unique

I believe that every investor is unique in that they must determine their own level of risk and workload vs. reward. There are no magic numbers or standards. This is your life, your investment, and your future.

Moreover, many people determine the return (reward) in many different ways. Some improperly neglect to include their personal time when calculating the reward and return. Some improperly neglect to factor in the use of their personal money, equipment, etc.

With that said, your question is of a personal nature. It is similar to asking how much money is enough. Or, how much money do I need to retire. Warren Buffett is worth Billions, yet he still works. By some people’s definition, he should be sitting at home ... retired and living off his retirement nest egg.

The best way to answer your question is for you to contemplate your personal and family goals, desires, and requirements. Then develop a plan to achieve the goals and requirements. Do you want a vacation home in Aspen, Colorado? Then what you need to do to accomplish this would be different from those who only want a BBQ grill in the backyard.

Enjoy developing your own plan.

[David Beard]

Originally posted by Engelo Rumora:

Hi Heajin,

The better class of area the lower the cap rate will be but higher potential for growth.

Personally I like to stick somewhere in the middle but will patiently wait for the right deal to come along before I buy it.

I like to buy run down properties that need rehab. Once rehabbed and tenanted they usually show around 30% net cap's.

Thanks for your time and have a great day.

Engelo -- the 30% cap house you're describing, I assume that is something that you're buying for $12K, putting in $5-8k, and renting for $750-800, is that about right? You stated that you like to "stick somewhere in the middle", but the 30% houses are bound to be in pretty low-end areas in KC, which is pretty similar to my market.

[Engelo Rumora]

Hi David,

Thanks for your message.

You are close with the numbers mentioned. I own property in other areas not just KC.

There are solid B class areas like Ruskin in KC where 30% can be found if bought well.

Thanks.

[Ali Boone]

10% can be a great return and I would look at a deal showing 10% returns. But what is your definition of returns in this context? Are you talking about cap rates, cash-on-cash returns, etc. and what do you factor into each that determines that 10%? Those details are critical.

And I agree with some of the past comments, it's not always about just the returns. I'm huge on quality. I'll sacrifice some points on the returns for higher quality.

[Marco Santarelli]

@Heajin Kim, these articles I wrote might be useful to you:

Cash on Cash Return

Calculating Return on Investment in Real Estate

Continued success!