Risk Adjusting Real Estate Returns

[Brent B.]

I'm wondering which REI metric is best to use when comparing a Real Estate deal to the return on the Stock Market. In addition, how do I know if I'm receiving an appropriate risk premium for the extra risk I'm taking on in a Real Estate Investment when comparing to just investing in stocks?

I want to analyze a deal and know whether it's worth it to pursue the deal opposed to just investing in the stock market to earn a 7% annual return. Would Cap Rate be the appropriate metric? Is there a way to risk adjust the metric so that I can compare apples to apples with stock market returns?

I realize the Cash-on-cash return will tell you how much you earn on your cash investment, however, this factors in leverage and doesn't seem risk adjusted to me (i.e. I'm taking on more risk by using leverage and would assume the returns to be higher).

Bottom line, if I'm going to invest in Real Estate, how am I sure I'm adequately compensated for the risk premium I'm taking on over just investing in stocks?