What’s the minimum ROI or cap rate you should accept on a rental?

Question

6%?  8%? 10 minimum? What are your thoughts?

John Barrett · Answer

@Gregory Washington it completely depends on what your willing to accept.  ROI and cap rate are simply metrics that you, as the investor will use to allocate your funds according to your investment strategy.  Your strategy will vary at different times depending on the goals you are trying to accomplish with your money.  The returns that you are able to generate are dependent on your skills, drive, relationships and markets you invest in.  General rules of thumb for return thresholds have the potential to be wildly inaccurate as a result.

My advice is to spend some time determining exactly what it is you want to achieve with your investment / investing.  The obvious answer is to have the highest returns possible but never  forget that higher returns are normally associated with higher risk.  This will give you guidance on whether or not the return on any property is sufficient (moving you toward your goal & compensating you for the risk involved).   So highest return for the level of risk you are comfortable taking on.

Best of luck with all your investments.

Thomas S. · Answer

I prefer not to keep my cash in real estate and therefore do not use ROI as a metric. I prefer 100% financing through the seller and refinance to pull any dead equity. My cash is then moved to a income fund that over time has will averaged a minimum 10% return.

So I guess 10% ROI would be a absolute bare minimum requirement.

Matthew G. · Answer

@Gregory Washington It completely depends on which market you are investing in. You won't see 10% cap rate in most areas of CA, but you should get appreciation. With appreciation your IRR might be significantly greater than if you invested in a 10% cap rate property that has no appreciation. If you get a lot of appreciation you can pull out the equity and purchase more properties and would do better than going on cap rate alone.

Gregory Washington · Answer

Thx

What’s the minimum ROI or cap rate you should accept on a rental?

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