Question:
“I’ve been looking for an investment property for several months to buy and hold. I’m open to a house, condo, duplex, triplex, or fourplex. Just nothing with 5 or more apartments due to financing. I’m trying to get at least a 10% return and…”
Answer:
Hold on…10%?
If you’re banking on a straight 10%+ “cash on cash” return (excluding appreciation), you’re going to have to:
- Make dozens & dozens & perhaps more dozens of offers, AND…
- Get very lucky.
With banks paying from near 0% and up to 1.75% (5 year CD), lots of smart money has been seeking better returns and buying real estate.
This has pushed down rental real estate returns to a still-attractive figure of some 5%, NOT including appreciation.
If you factor in appreciation, the return is much higher. Warning: Math to follow!
Remember that appreciation is based on the full purchase price. But if you finance your investment, you’re leveraging your money.
Example:
- You put 20% ($20,000) down on a 100K condo.
- In one year, the condo appreciates 5% ($5,000) to $105,000.
What is your return or profit “on paper”? Is it 5%?
Nope…It’s $5,000/$20,000, or 25%!
So let’s add ‘em up…
5% cash on cash return
+ 25% paper return
= 30% return!
Quick comments:
- The 25% return is only realized upon sale.
- Leverage cuts both ways. Ask anyone who invested in 2006. They had a huge NEGATIVE return.
This is why more wealthy people made their money in real estate more than any other investment vehicle.
Obviously, I definitely recommend real estate as an investment (as you can see, not just because I sell real estate!), but you need to be realistic or you’re going to be disappointed.
So forget the 10% cash return goal because it’s probably not going to happen. But remember that if your property appreciates, you should do much better than 10%.
