ROI as basis of determining a good deal

[Brianni Johnson]

Good morning, I'm doing some research where I want to determine what investors believe constitutes a "good deal". Do investors consider ROI as a deciding factor when analyzing deals? If so, what is an acceptable ROI?

[Joshua Martin]

@Brianni Johnson I think ROI is all that matters when evaluating investments...

What kind of return you expect depends on your local market. A areas might be happy with a 5-7% cap rate, in C- to D areas investors might expect something more like 15-20%...

There's several metrics to use, but look up the Definitive Guide to Cap Rate vs. COCR here on BP. That's a great source and explanation of the values and limitations of those metrics.

As for more complicated metrics, Internal Rate of Return, for example, those are used more in commercial and multi-family deals and I'm yet to meet anyone talking about the IRR with a single family.

How you know what's good for you area is by calling property managers, networking, talking to other investors, and studying the cap rates on recently sold properties (you don't need to know the actual cash invested for this one, so rents relative to purchase price is enough). 

Another quickie is the 2% rule, which often works here in Milwaukee, but as I understand is rarely achieved in larger markets, out east, for example.

Best,

  JTM