Return Threshold for Real Estate Investment

[younginvestor2013]

Calling all real estate investors:

What is your return threshold for pursuing a real estate investment? Or, by what other primary measure(s) do you decide whether or not to invest in real estate?

It seems like most evaluate deals based on cash on cash return (annual cash flow pocked after all expenses divided by initial cash outlay). Would you consider a 7-8% cash on cash return good enough to pursue a deal?

 

[tryan]

Would you consider a 7-8% cash on cash return good enough to pursue a deal?

No .... I need to see a way to 20%. Of course the "bumps in the road" (unexpected: repairs, natural disasters, vacanies ... ) will reduce the return. 7-8% simply doesn't allow for the unexpected.

 

[gerntz]

Regardless of %, I needed a + cash flow from the start with some allowance. % builds over time.

 

[Fishingmn]

Most investors who are buying with 20-25% down are going to be looking for 15-20% minimum cash on cash return. Those are really hard to find in today's market.

Tryan's remark isn't very helpful - any investor is already going to have a model that factors in vacancy, repairs/maintenance, insurance, taxes, utilities, regulatory licenses and any other costs of ownership. Calculation of returns should be done after that.

There are some conservative investors, like me, that bought into properties using all cash. Then the cap rate and cash on cash return are the same. I bought all of my places with a 8-10% initial return using conservative cost estimates (again hard to find now). With the increase in rents in the past few years I now average a 9.72% return across 11 properties and I view them as the bulk of my income when we retire next year. They have appreciated about 45% but I don't factor that in since I plan to hold long term. I am much more confident about the ability for this income flow to keep steady with inflation over time then other alternatives.

 

[calmloki]

We buy or lend depending on whether we like the place. Add work to make it profitable. Guess we are just lucky that all has worked out well.

 

[Winemaker]

I purchase buildings w/2-4 units; finance 80%, must clear $250 per unit after expenses/per month. Must kiss a lot of frogs to find my princesses; but they are out there. I usually refinance my personal residence to get a much lower rate after a few years. Investment property usually demands a 1.5-2.5 premium for a normal mortgage. Depending on lender, some classify 4 units as commercial, and must be refinanced every 5 years. I do not take HUD; I rent very good units, take very good care of them, I do not discriminate but EVERYONE has to meet my criteria to get accepted. I preform 95% of the maintenance and work, and been doing it since '99, w*rking 6 days a week in my FT j*b ,until I FIRED in 10/2014. God has certainly blessed my family and I.

 

[tryan]

Tryan's remark isn't very helpful - any investor is already going to have a model

Perhaps my point got lost .... your "model" is exactly that ... a prediction or glass ball. Your "model" can't see behind the walls or under ground, or predict the future tenants problems. 7-8% is simply too slim for me ... to each his own.

Case in point, I just learned that two houses I own have lead pipes as a main water line ... expenses to repair will be a 4 digit figure (each). I have owned these 20+ years ... never been an issue. But now I have an expense that will severly cut into the annual cash flow of these properties. Nobody's "model" would account for this 20+ years after purchase.