What returns do you target on your real estate investments

Question

I was wondering what BiggerPocket members target as annual returns on various categories of real estate investment.  I am not talking about returns in your real estate business, such as wholesaling or flip and fix, as these are too hard to separate the investment aspect from the business aspect.  I am talking about more passive real estate investing.

I'll start.  On my investing in private loans, I target 18% annual.  On my buy and hold I target minimum of 10% on high quality property (7% cash flow + 3% appreciation).  On my lower quality buy and hold I target 15% .  On my speculative investing on want a minimum of 20%.  Obviously, I have had investments which ended up exceeding these returns; I have also had investments which lost money, but these are my minimally acceptable anticipated returns on my personal investments.  I also invest for other people, most of which have  lower targeted returns.

How about you?  What are your targets annual returns?  And do you think it possible to be a successful investor without having a targeted rate of return?

Andrew O. · Answer

With regards to risk, research, due diligence and analysis up front obviously vets an opportunity, but once that has been done, it comes down to gut feeling for me. I know what the numbers say, what the research says, do I feel good about it? About the people who are involved?

Be prepared to walk away if not, don't let green cloud your judgment. Especially if you have the money, be in the drivers seat. Know what your money and time is worth to you, set a goal for ROI % (active or passive), and stay on top of your different income avenues, if a source of income is underperforming, know why, fix it if you can, if not, plan an exit strategy.

Interesting thread,

Andrew

Bryan Hancock · Answer

We target gross, unlevered, project-level returns of 30% on our specs with a $60k net-net floor for profits.  With 80% LTC construction loans and exit fees it is not uncommon for these projects to do in excess of 80% annualized ignoring the hassle factor and the time spent.  Projects generally take about a year.  We try to keep things close to FHA-loanable to hedge risk in the event of a market downturn so that we could trim margins and still unload inventory to the largest possible buyer pool.

For our rentals I like to try to get at least 15% inclusive of principal pay-down, equity, and cash flow (ignoring tax shields) given a targeted long time horizon.  20% would be a better target for a 5-year hold that we were trying to reposition and exit more quickly.  I like to keep debt on our rentals because it is a nice inflation hedge for the rest of our portfolio.

The lower and less risky returns in our portfolio come from AssetBuilder funds with very low management costs through Schwab.  They use Fama/French models to target around 12-14% and this can be done passively; thus the 15%+ threshold on rentals.  Stocks were laggards for years, but this year they have made us a nice, tidy profit and over the long haul they'll do well with virtually zero management hassle.  AssetBuilder actually has a nice chart showing how reliable their returns are based on their targets here:

Growth Of Wealth By Product

The geometric mean for our overall portfolio for the last 4 years has been:

+25.7%

+20.7%

+20.1%

+19.7%

It is getting harder and harder to make it grow at this rate with more under management so I expect it to decrease modestly for the next several years unless our spec projects exceed expectations.

In general we try to minimize risk on projects held for longer durations.  For shorter durations in projects we know very well we can take more risk and watch them extremely closely.  Weekly status reports are tracked for we and our investors to make sure things are tracking as much as possible to our pro forma projections.  If we're targeting high rewards we want to err on the side of over-managing things and being as good of stewards for the capital as is possible.

Elizabeth Colegrove · Answer

I target a 7-10% CAP Rate. These are high quality tenants with newish homes and low vacancy/mantaineance requirements in areas with historic appreciation.

Chris L. · Answer

Don,

My measurement of risk is tied 100% to my experience level.

For instance, many are terrified of purchasing rental properties because they have heard all of the horror stories from the "Do it yourselfer's."  I have a great property management team and I know with a 95+% certainty of how a property will perform when I buy a property.

I learned this through trial and error.  I have not had the benefit of learning from others in my investing career and have made a lot of mistakes to find the investments that work for me.

The times that I have found someone that I thought was "smarter and more experienced" have unfortunately resulted in some of my worst investment outcomes.

I continue to seek out new avenues and am always open to evaluating different investment options although I try to do a more thorough analysis than I did in my past.

Chris

Bill Gulley · Answer

How about these numbers?  .5% , 1.5% ?

Servicing and sub-servicing overrides on loans are much different, that first rate, but some could run much higher, 3.5-4%. Originations on secondary mortgages run at 1.5% to 2% and as low as .75%. Doesn't count processing fees that varied, $200 to 1%.

That wasn't my money above, on mine residential was 10%, our usury limit, commercial 10-14%, but each is different. Partnership 25-50% equity.

Participations on some deal, flip, contracting and facilitating some deal targeted a flat fee of $5k but usually hit higher. Depended on the time required and risk of the deal.

Notes, well, actually there was no target %, that minimum of 5K to touch something usually, but as a % probably mid 20s to the moon, as a ROI on notes refinanced quickly.

Rehabs, were again on a flat rate basis plus 5-10%, rentals at 14% NIBT including  expected 3% appreciation.

Consultation was basically set above a neighboring CPA and about 20 bucks less an hour as my attorney but that went up to the same rate when they were pulling 100-120 an hour. Appraisal fees were hourly.

Much of that are historic, not doing that any longer. Now returns are 8-10%, loans still outstanding, up to 25% on partnership/gold/non-RE.

Taking an approach of x dollars on your activities is basically and hourly determination and was frankly an unknown. Besides secondary loans and servicing, rates were never really the consideration so much as it was generally just looking at X dollars and what was involved, the decision made, mess with it or not. A use of funds determination and usually under circumstances of unknown opportunity costs if staying in the RE arena.

Since you're lending Don, I'll mention thoughts on the use of funds. You can't really take cash and get hung up in other long term investments, if the decision is made to lend, you need available reserves to act when requested, the cost of doing business is part of that opportunity cost evaluation. Rate spreads become more important if you don't borrow from the Fed. :)

J. Martin · Answer

@Don Konipol ,

I target 6-9% cash flow ROE on new purchases, although this is in the Bay Area where it's hard to find any cash flow. This return is also with 30yr fixed financing, lots of maintenance and reserves factored in, and relatively low-headache tenants. My prior purchases are higher and FHA ROE can't really be calculated because it was all borrowed. But the numerator is great! There's another 2-3% ROE "accrual" returns in principal paydown. And 3-4X leverage on any appreciation returns. At a long-term rate of 2%, that would add 6-8% ROE in appreciation returns.. No guarantee, but I also have to look at the reasonable upside and downside in assessing my purchases.

6-9% in CF
	 2-3% principal paydown
	 6-8% appreciation

= 8-12% ROE before appreciation, 
	 14-20% after appreciation, over longer-term

I might add that buildings are in good condition and rents/ft are about $1.50/month (or $12/ft/yr), so a fluctuation in vacancy or expenses won't change my income too much. I noticed that in many low-income areas BP investors are in, the REO appears high (20-30%!), but a single new AC unit or wood rot job can take the profit negative for a year or more! Yikes!

Pat L. · Answer

18%-20% on CFD after I add a 8-10% premium above cost.

(For Veterans investment properties I HML on... 9%. Other investor short term HML 12%-18%)

My BH are free & clear; avg 9%-10% cash flow on cost but have all more than doubled in value. My single Low Quality BH pays 30% but I just sold it.

Specs 40% or 'forgetaboutit' :)

At this stage in life if it doesn't make double digits I am just NOT interested.

Levi F. · Answer

Currently we do only buy and hold but we structure our return targets in a similiar way; by area/quality. In lower cost areas we target 20% as a minimum in other areas 12-15% depending on quality and condition. Again, these are our mimimums, we aim for more, but our purchase/renovation investments are limited by estimated ROI.

Ali Boone · Answer

"Return" is a very broad term and without a defined set of what goes into calculating a "return", we will all give answers that have different bases. Are you asking about cap rate, actual rate of return on your money, actual or theoretical appreciation (because how do you calculate actual unless you just take an inaccurate zillow value or order an appraisal?), and are you taking in any other returns such as tax benefits?

The scale of a "return" is unfortunately very wide so in order for all of us to calculate actual returns, we'd have to spell out the criteria for which one calculates a return.

Not to be a total buzzkill...

Andrew O. · Answer

For now I like to aim for 2% on SFR's (not finding much these days in CA).

It looks as though this year we will make 13% funding flips, I'd like to see that above 15% and closer to 18%; partly my fault, the flipper we work with slowed down due to hedge funds earlier this year, I should have diverted some money to another avenue, rectifying that for the new year.

Management deal starting in February will have me happy over 18% (actuals show 22%).

ForEx I expect 60% per annum, I prefer 5% compounding monthly. This is a small slice of my funds as it is risky.

Overall I would like to see 15%, then use that as the benchmark to improve from next year.

Andrew

Edit: I am looking to sign up with Dave Van Horn's PPR note co. start of the new year, I would like to see 15% from the notes. However it would be nice to structure some to hit some higher numbers.

What returns do you target on your real estate investments

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