How to Get a 25% Annual Return on a Real Estate Investment

What? How can I get a 25% annual return on one real estate investment when interest rates charged bankers are almost zero, savings rates are 1 to 2%, and mortgage rates are about 4%. Your mother, bless her heart, would shake her finger at you and say, “If it sounds too good to be true.…” You know the rest.

What if I could show you how to get an annual return on investment (ROI) of 6.9%, 9.5%, 14% and even 25% ROI annually in this investment climate?

Jean Folger at Investopedia writes, “Return on investment is a measure used to estimate and evaluate the performance of an investment or to compare the performance of a number of different investments. To calculate ROI, the net profit of an investment is divided by the amount of money invested, and the results are expressed as a percentage or ratio.

For instance, if you buy ABC stock for $1,000 and sell it two years later for $1,600, the net profit would be $600 ($1,600 - $1,000). The ROI on the stock would be 60% ($600 ÷ $1,000 = 0.60). The annual ROI can be calculated by dividing the 60% by the number of years (2) and that is 30% annual ROI.

In a Cash Real Estate Property Transaction, you might buy a property for $100,000, spend $9,000 on carpets and paint, $1,000 on closing costs to bring your entire cost to $110,000. Suppose you rent the property for $800 a month or $9,600 for the year, less expenditures for property taxes and insurance of $167 per month, you enjoy an annual return on your $110,000 of $7,596. That’s a 6.9% ROI cash on cash return.

In a Financed Real Estate Property Transaction, “Assume you purchase the same $100,000 property as above, but instead of paying cash, you take out a mortgage, making a 20% down payment. Your costs are $20,000 for the down payment ($100,000 sales price x 20%); $2,500 for closing costs (they're higher because of the mortgage) and the same $9,000 for remodeling. Your total out-of-pocket expenses are $31,500 ($20,000 + $2,500 + $9,000).

“Assuming your tenant pays $800 every month, you will have a cash flow of $251.07 monthly ($800 rent - $548.93 mortgage payment including property taxes and insurance). Again, fast forward one year. Multiplying that $251.07 by 12 determines your net annual income, or return: $251.07 x 12 = $3,012.84.”

Next, divide the annual cash flow by your original out-of-pocket expenses (the down payment, closing costs and remodeling) to determine the ROI. $3,012.84 ÷ $31,500 = 0.095. Your ROI is now 9.5%.

If you include equity build-up, which is not cash, the return gets bumped to 14%.

If you are planning on investing in income producing properties, these are the calculations you would make to determine which has the greatest ROI. Of course location, location, location and other factors also figure in.

So, how can I get a 25% annual return on a real estate investment?

Suppose we find a $50,000 four-plex, where the property yields $2,000 ($500/unit) monthly rent. The investor puts in $50,000 (I'm not adding any closing costs to keep it simple) and in one year (provided he has no vacancies) he will receive $24,000, nearly a 50% return on his initial investment of $50,000. Factor in expenses, property tax, insurance, etc. and it goes down to 25%. That is very simple but possible.

Perhaps I should have said, for example, if you buy a $500,000 (discounted) property with a 20% down payment, your investment is $100,000.  If the property appreciates 5% in the first year, it will be worth $525,000 -- a $25,000 gain, or a 25% return on your original investment.  And that does not additional gains from the rental income generated or the tax savings from mortgage interest and depreciation deductions.  Does that seem more believable?

Our examples of returns greater than banks and government bonds are based on actual circumstances.  Maybe the examples still don’t fit your financial and risk parameters. Currently, investors that participate in an apartment syndication are getting a flat 7-10% yield, without any real management responsibilities or expenses.

You might get the impression that we like real estate.  We do and we see many opportunities to get decent returns on your hard-earned savings.  Do your homework, work the numbers and don’t settle for less than your target and you can achieve significant profits through sheer determination and commitment alone.

Bill Manassero is the founder/top dog at “The Old Dawg’s REI Network,” a blog, newsletter and podcast for seniors and retirees that teaches the art of real estate investing. His personal real estate investing goal, which will be chronicled at olddawgsreinetwork.com, is to own/control 1,000 units/doors in the next 6 years. Prior to that, Bill and his family lived in Haiti as missionaries serving orphaned, abandoned and at risk children.