Yesterday afternoon I sat down with a knowledgeable client and we worked out a prospective return for a house he currently owns and is thinking of converting from a primary residence to a rental property. After working through the numbers we determined the return on investment and then discussed it.
I know you want me to tell you the return number. But it’s not really relevant. What has to be determined is what else could you do with that money and what would the returns be if you did?
When you own and/or manage a rental property you have to step back at least once a year and recalculate your returns. Are you better off in the stock market with that money? Bonds? Under the mattress?
What will the future bring? Inflation? More deflation?
If I thought inflation I’d hang on to as many hard assets as I could. Remember, 24-36 months ago very few saw the magnitude of our current financial collapse. So who knows how quickly inflation could set in with all the money the fed is pumping into the economy.
Long term deflation? Unlikely in Kansas, but not off the table. Then it’s best to sell now and stuff under the mattress. 🙂
If I’m helping you purchase an investment property here in Kansas City I’d like to get your overall capital growth up to about 15% – 22% a year. Converting a residence can be considerably lower because of various other factors. But a rental property return should definitely be higher than you can get elsewhere if for no other reasons than with rental property you have to work with tenants, property managers…and your money is not liquid.
Think about all of that and then decide what is an acceptable return. What is acceptable to you may be very different than what is acceptable to me.