How important is Rate of Return

[Ryan Baker]

I'm currently looking for my first rental property in the Sarasota/Bradenton (particularly Bradenton due to costs) area. I've been searching through the MLS for 2/2 or 3/2, 1100-1400 square foot properties in the $120-150K price range. What I seem to be finding is rental rates of about 1400-1600 a month for this type of property. This tends to create a Cash return of about 5-7%, and cash flow 150-200 a month. My question is: if you're getting your desired cash flow, who cares what your CoC or Cap rates are? Is it completely ridiculous to consider buying something like this? I've heard multiple versions of "criteria" involving similar requirements for SFH, which require cash flows of $100-200 a month on various podcasts and posts. So if this criteria is met, does it really matter what the return is on a SFH rental?

[JD Martin]

No. Rate of return is only important to you. Some people are so risk averse they are willing to settle for a percent or two on bonds, cds or similar. For me, I can't be worried about real estate if I can't pull at least 10% annual return after all expenses (including taxes, capital, maintenance, vacancy, etc). Despite the "passive" claim on real estate investment, I find it requires far more "active" participation than any other investment I have and thus warrants higher returns. But if you are in a place where you can abide by a specific rate of return, it doesn't matter one iota what that level is. Caveat: some investors consider strong cash flow a hedge against loss of principle, i.e. falling real estate values.

PS: If you are playing with other people's money, i.e. you have a loan on the investment, weak cash flow puts you in a position wherein you may have to use your own assets to cover losses. If you are just looking for a place to park your own cash, you have a lot more leeway on what's acceptable.