Annualized Returns Question

[Eric Krikke]

Basically what I want to find out is a comparison of a real estate investment versus what returns I could get in another investment vehicle (like the stock market).  Please help me think through this hypothetical example.

If I have $100k to invest and choose the stock market on a normal year I should expect annually a 7% growth year over year so in 5 years that investment grows to $133,822.

If instead i take that $100K and purchase $400,000 worth of real estate on 4 identical properties with 25% down, cash flowing $250 per month each and appreciating at 3% per year what is my annualized rate of return after 5 years?  What are the relevant numbers to use in this equation? 

[Mitch Messer]

Hi @Eric Krikke and welcome to BiggerPockets!

Let's recap: You make an initial investment of $100K ($25K down for 4 separate houses), earn $1000/mo in cash flow ($250/mo x 4 houses), and each house appreciates 3% per year.

You'll need to determine:

1. How much you will have earned in 5 years (assuming you sell the property then)
2. What annualized return that total future earnings amount would represent

You also need to declare/establish:

• An amortization period for your 4 mortgages: Let's say 30 years.
• A mortgage rate: Let's say 4% annualized.
  
• A discount rate - the interest rate which you could earn on the cash flow you collect each month: Let's set it at 5% annualized.

OK, let's do this!

The total earnings in 5 years will be the sum of:

• Earnings from cash flow from 4 houses: FV(5%/12,60,1000,0) or $68,006.08
• Proceeds from sale of properties:
  • Value of each property is FV(0.03,5,0,-100000) or $115,927.41
    
  • Loan paydown for each property is CUMPRINC(0.04/12,360,75000,1,60,0) or $7,164.37, making the payoff balances $67,835.63
  • Total sale proceeds are 4 x (115,927.41 - 67,835.63) or $192,367.12

So, in 5 years you'll have a future value of $260,373.20, which translates into an annualized return on your initial $100K investment of RATE(5,0,-100000,260373.2) or 21%!!

Now assuming I got all that right, there's no real competition here!

Rental real estate rocks!