A newbie asks, "What's your lowest accceptable ROI on a rental?

7 Replies

New to BiggerPockets posting (read the site a lot though) and new to real estate investing, in the Birmingham, AL area. Here's my first question for the BP reader forum:

My business partner and I are working on making our first buy of a town home rental property in the Helena-Pelham-Alabaster area of Alabama. We've run a handful of ROI calculations and are finding it challenging to find good properties that could give us an ROI of over 10%, taking the usual expenses into consideration. One source of "mentorship" says if you can't get at least 20%, then it is not worth your time. So in your experience (anyone?), what do you consider an acceptable ROI in your rental property business? Thanks for the input.

Welcome to Bigger Pockets Lynn! I would highly recommend taking a read through the Education center here on the site. Brandon has a great book called "Rental Property Investing" it's definitely worth reading. There are also some downloadable podcasts you can listen to related to ROI. You will find a sizeable amount of information throughout the site on ROI, including scanning through the forums. The calculators are also helpful.

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That ROI, which you as the investor, is willing to earn, given your own needs goals, dreams, desires and time horizon. I bought a house once for 68000. Rented it for $200 a month to a couple that could not afford more, but they took really good care of it. With taxes, insurance, sewer and garbage and a home warranty plan, I was negative about $125 a month. I sold the house 16 years later for $296,000. I think you see my point here...

Hi Lynn,

20% is pretty aggressive. Especially, for your 1st investment. The real question is "what return is acceptable given your other options?" 10% might be great vs. an average return of 7% in the stock market. Unless, the house is in a D area and you spend 20 hours a month managing it.

My other question would be "what does the 10% include?" Is is just cash flow? or are you including depreciation, mortgage paydown, and appreciation? The other 3 are more difficult to nail down, but if you're just looking at cash flow, you're missing much of the larger picture.

I highly recommend Frank Gallinelli's book "What Every Real Estate Investor Needs to Know About Cash Flow..." Really opened my eyes to more sophisticated methods for evaluating potential deals.

Especially, Internal Rate of Return (IRR), which judges an investment against other investments.