What Return Should You Be Looking For?

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?istock_000001554959xsmall 

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.

3 Comments

Filed under Real Estate Investing

3 responses to “What Return Should You Be Looking For?

  1. Another Investor

    OK, Chris, I’ll bite. You may have done this before, but please show us how you get capital growth rates of 15 to 22 percent with the rents and expenses in your market in Kansas/Missouri. How much of the growth is projected appreciation magnified by leverage and how much is from net cash flow?

    There is an interesting discussion over at Bawld Guy about how and where you should be investing for maximum income once you reach retirement. Jeff is going to do a series of posts on the topic. I would love to hear your opinion on this subject.

  2. Pat

    Chris:

    I purchased a duplex west of southwest trafficway in KC with cash. It had long term tennents paying $420 each and all utilities except water. After making repairs, I will have about $80,000 in it. Should I wait to refinance (get first loan) until I find another property, get a loan after repairs are finished or just enjoy the 14% return before taxes?

  3. AI – See today’s post. 🙂

    Pat – I cannot answer your question without knowing more. But, 14% with no expenses seems kinda nice right now. 🙂 But I also think that you may be leaving a lot of growth out there that could be helping your future situation. Every decision you make is individualized. What is right for you may be different for someone else.

    Feel free to call me and maybe we can figure out something rather quickly. Or maybe we’ll actually have to sit down and talk.

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