Is 6% a good return on investment?

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Is 6% a good return on investment?

Rahul Handa

Bolingbrook IL · Member since 2018 · 57 posts · 13 votes

Is 6% return good after taking everything into concern ( pm, capx, vac etc). Should i shoot for higher return or not?

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Russell BrazilBusiness Member

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Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes

There is no such thing as a good or bad return. There is only your risk tolerance, and the risk associated with an asset.

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Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
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Depends on what that 6% is made up of.
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Joel OwensBusiness Member
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Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
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Return is subjective. Various factors are out play with tolerance for risk etc.
Example someone making 50k a year trying to quit the rat race and in their 30's in age might need the capital to work harder at a clip of 15% or more. Conversely one of my clients that is a doctor making 1 million a year doing surgeries doesn't need the money. It is low on their list compared to wealth preservation and tax benefits. 6% of 1 million investment is 60,000 if paying all cash.
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Russell BrazilBusiness Member
Moderator
Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
7y
There is no such thing as a good or bad return. There is only your risk tolerance, and the risk associated with an asset.
[email protected]301-893-4635 Podcast Guest on Show #192
District Invest Group546 Reviews
Website View Page
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Matt Brown
Rental Property Investor · Nolanville, TX · Member since 2008 · 130 posts · 88 votes
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@Rahul Handa
I guess the better question would be... I'm looking at 6% Cash on Cash, what's your comfort level?
Personally I go for 9% in my area. Makes it tough but if I get that then I consider it a good deal. Getting less than that isn't too difficult.
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Bob B.
Investor · Jasper GA · Member since 2015 · 1k+ posts · 1k+ votes
7y
6% plus 7-10% appreciation and a tenant paying down a the mortgage might be a great deal.
6 Reply
Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
7y
For me, that answer is it depends. It depends on if the return matches the minimum requirement generated from your REI Business Investment Plan. Personally, only 6% in any form stinks, if for no other reason than it leaves no room for any negative adjustment.
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David Nolan
Professional Property Investor · Brisbane, Queensland · Member since 2015 · 165 posts · 160 votes
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@Rahul Handa
You might want to study up on risk reward ratios and what they mean. Real estate investing is more than simple numbers.
Good luck on your journey!
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Joe SplitrockPro Member
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Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
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@Rahul Handa as of today's prices, ATT stock is paying 6.6% annual dividend ($30.80 per share pays $0.51 four times per year). So looking at it strictly from a cash return, you could buy a passive stock investment that pays similar.
Of course real estate has other advantages:
1. Property value appreciation - depends on market but generally the property increases in value over time
2. Leverage/mortgage pay down - you are buying 100% of the asset with 20% cash down, over time tenants buy the other 80%
3. Tax advantages - income is tax advantaged versus other investments
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Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
7y
Originally posted by @Joe Splitrock:

@Rahul Handa as of today's prices, ATT stock is paying 6.6% annual dividend ($30.80 per share pays $0.51 four times per year). So looking at it strictly from a cash return, you could buy a passive stock investment that pays similar.
Of course real estate has other advantages:
1. Property value appreciation - depends on market but generally the property increases in value over time
2. Leverage/mortgage pay down - you are buying 100% of the asset with 20% cash down, over time tenants buy the other 80%
3. Tax advantages - income is tax advantaged versus other investments
You left two more out (my favorites):
4. The ability to extract all the money you put in, and still "control" the property...and the profits coming from it.
5. The compounding effect of the returns when you take advantage of #4 above.
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Thomas S.
Member since 2016 · 13k+ posts · 12k+ votes
7y
6% is not worth my time but it is relative. There are many investors that do not use leverage to purchase real estate. They are ultra conservative investors and their cash is earning no more than the present mortgage rate that they are saving by not having that mortgage. In todays mortgage markets their return would be less that 6%, maybe 4% certainly not more than 6%, so it really is relative to what you desire.
1 Reply
Dennis M.
Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes
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Why do you ask ? are You going to the bank to buy a CD ?
0 Reply
Taylor Chiu
Real Estate Agent · Salt Lake City, UT · Member since 2014 · 473 posts · 230 votes
7y
@Rahul Handa I got theirs have said, it really depends on how much risk you are willing to take and what your long-term goals are. That said, Assuming a young investor without much money, 6% all in is not very good in my book. You could just get an index fund and return at least that much and it would be completely passive.
Now if you were to get 6% return from your rants, and then be expecting 3% appreciation gain year-over-year, that might not be that bad.
Personally I shoot for 20% return on my money, although I mainly invest in higher maintenance areas and in value add rentals. So there is more work involved
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Johann Jells
Rental Property Investor · Jersey City, NJ · Member since 2011 · 1k+ posts · 876 votes
7y
Originally posted by @Joe Splitrock:

@Rahul Handa as of today's prices, ATT stock is paying 6.6% annual dividend ($30.80 per share pays $0.51 four times per year). So looking at it strictly from a cash return, you could buy a passive stock investment that pays similar.
Of course real estate has other advantages:
1. Property value appreciation - depends on market but generally the property increases in value over time
2. Leverage/mortgage pay down - you are buying 100% of the asset with 20% cash down, over time tenants buy the other 80%
3. Tax advantages - income is tax advantaged versus other investments
You left off that rents usually rise too. The importance of leverage is often understated. Some of you might have heard this rant of mine, but 25% down on a 15 year note will yield ~9.5% return on cash if the property is truly zero cashflow. This is why the people who think investing without cashflow is braindead are wrong, that would be considered a great 15 year return for a hedge fund. Madoff territory! Plus there are very few areas where over 15 years values and rents don't rise.
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Mark Fries
Contractor · Jacksonville, FL · Member since 2017 · 1k+ posts · 2k+ votes
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@Rahul Handa
6% sucks....20-30% way better.
1 Reply
Evan Rosenboom
Member since 2019 · 7 posts · 3 votes
7y
Don't get me wrong, I am new to this and am no where near an expert. I personally am getting started 100% cash, and my goal is to build up a passive income that exceeds my current W2 job, so a 6% Cash on Cash return isn't all that matters, one thing I haven't seen anyone mention is what your cashflow will be, or what your goals are. Cashflow is king for me.....but hey that's what's great about REI, it can be what ever you want it to be. (that 6% in the stocks that people keep recommending doesn't account for monthly cashflow)
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Rahul Handa
OP
Bolingbrook IL · Member since 2018 · 57 posts · 13 votes
7y
Originally posted by @Mark Fries:

@Rahul Handa
6% sucks....20-30% way better.
Thanks
1 Reply
Thomas S.
Member since 2016 · 13k+ posts · 12k+ votes
7y
Keep in mind cash flow is produced by the property. If you have equity in the property (buying with cash) that is calculated as a separate income stream. To calculate the cash flow produced by the property itself you assume a 100% financed property, subtract the payments required and all estimated expenses and you then have the cash flow the property would produce on it's own.
When you have equity in a property it generates a separate income stream you subtract from your rental income first. How much you subtract is a minimum the prevailing mortgage interest rates. If you expect a 10% return on your cash that is what you must subtract from the rent first.
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Johann Jells
Rental Property Investor · Jersey City, NJ · Member since 2011 · 1k+ posts · 876 votes
7y
Originally posted by @Mark Fries:

@Rahul Handa
6% sucks....20-30% way better.
Why don't you explain how you achieve that? In the real world numbers like that involve bubbles and significant risk, or getting real lucky timing a market. Global hedge funds are chasing numbers far less than that.
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Patrick Soukup
Rental Property Investor · Fort Collins, CO · Member since 2015 · 273 posts · 127 votes
7y
@Johann Jells 20-30% is easily attainable. See below:
Purchase Price $350,000
Downpayment (25%) - $87,500
Loan Amount: $262,500
Loan Details: 30 Year Fixed Mortgage at 4.5%
Gross Potential Rent: $2,200.00
Loss to Lease/Vacancy - 5%: ($110.00)
Monthly Principal and Interest Payment: $1,330.05
Monthly Operating Expenses: $627.00
Monthly Cash Flow: $132.95
Cash on Cash Return: 2%
Year 1 Appreciation: 5%
Year 0 Value: $350,000 + 5% Appreciation = Year 1 Value $367,500
Principal Balance at the end of the 1st Year: $258,265.26
Principal Paid Down over the 1st Year: $4,234.74
Depreciation:
Value of the Land (not depreciable): $35,000
Value of the Building (depreciable): $315,000
Depreciable Years of A Rental Property: 27.5
Annual Depreciation Expense: $315,000/27.5 = $11,454
Estimated Tax Bracket: 22% - Tax Savings on Depreciation: 11,454*.22 = $2,519.88
**Depreciation recapture on sale**
Total Year 1 Cash Return on Investment: $1,595.40
Year 1 Appreciation: $17,500
Principal Pay Down: $4,234.74
Tax Savings (Depreciation Expense): $2,519.88
Total (Unrealized) Return on Investment: $25,850.02 or $25,850.02/$87,500 = 29.5% ROI
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Johann Jells
Rental Property Investor · Jersey City, NJ · Member since 2011 · 1k+ posts · 876 votes
7y
@Patrick Soukup that's an interesting way of looking at it, but I do not believe most investors would take such modest returns as 1.8% cashflow and 5% appreciation and package it as a 30% gain for discussion purposes. Your head would explode if I calculated my returns like that! I might do it for fun when I get a moment.
1 Reply
Patrick Soukup
Rental Property Investor · Fort Collins, CO · Member since 2015 · 273 posts · 127 votes
7y
@Johann Jells - I agree. In Fort Collins, it is an interesting time, having been in the market for a while and watching a bunch of folks wanting to get into real estate investing. I don't know how 80% of them are making them work. I wouldn't want to be in their shoes if the market tightens at all. That 2% cash flow is ultra conservative as well considering a 30% expense ratio. Just fun numbers to play with (not actual returns).
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Johann Jells
Rental Property Investor · Jersey City, NJ · Member since 2011 · 1k+ posts · 876 votes
7y
Originally posted by @Patrick Soukup:

@Johann Jells - I agree. In Fort Collins, it is an interesting time, having been in the market for a while and watching a bunch of folks wanting to get into real estate investing. I don't know how 80% of them are making them work. I wouldn't want to be in their shoes if the market tightens at all. That 2% cash flow is ultra conservative as well considering a 30% expense ratio. Just fun numbers to play with (not actual returns).
Well, that was fun. Totally makes me look like a goddamn investing god. My loan is a 15 year, and I used the city re-assessment last year for $630k to calculate appreciation. That value is definitely low. And after I reno the next unit the cashflow will be at least $600 higher. None of this takes into account reno expenses and lost rent during it.
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Josh Cook
Rental Property Investor · Fort Collins, CO · Member since 2018 · 5 posts · 0 votes
7y
Originally posted by @Patrick Soukup:

@Johann Jells - I agree. In Fort Collins, it is an interesting time, having been in the market for a while and watching a bunch of folks wanting to get into real estate investing. I don't know how 80% of them are making them work. I wouldn't want to be in their shoes if the market tightens at all. That 2% cash flow is ultra conservative as well considering a 30% expense ratio. Just fun numbers to play with (not actual returns).
Exactly why I am hesitant to make Fort Collins the first market I invest in. It's the market I know at this point ("know" is relative, as what I know is limited at this point being new), but almost every house I have run numbers on doesn't make sense in my position (ranging from a small positive cash on cash return to a quite negative COCR: -25%). If I had known anything about real estate 5 1/2 years ago when I moved to Fort Collins, I would have talked to anyone I could to scrape together the money to buy my first property. It's not all doom and gloom, but, like you said, I want to make sure my numbers still work if the market tightens.
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Mark Fries
Contractor · Jacksonville, FL · Member since 2017 · 1k+ posts · 2k+ votes
7y
@Johann Jells
Gross rental income 9,600
- Vacancy allowance 960
Gross operating income: 8,640
- Operating expenses 864
Net operating income: 7,776
- Debt service 0
Cash flow: 7,776
Cash flow 7,776 ÷ Initial cash investment 12,000
Cash on cash return: 64.80%
This was my most recent deal. In the rear of an existing SFR property that I already own was a large storage building and I just spent 12,000 and converted it into a 2 bedroom 1 bath. Examples like this are what can happen when people think outside of the box and don't just play follow the leader. If you are having a hard time finding deals I recommend just taking a step back and examining what you have and see if you can just make your own deal.
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Johann Jells
Rental Property Investor · Jersey City, NJ · Member since 2011 · 1k+ posts · 876 votes
7y
Originally posted by @Mark Fries:

Cash on cash return: 64.80%
This was my most recent deal. In the rear of an existing SFR property that I already own was a large storage building and I just spent 12,000 and converted it into a 2 bedroom 1 bath. Examples like this are what can happen when people think outside of the box and don't just play follow the leader. If you are having a hard time finding deals I recommend just taking a step back and examining what you have and see if you can just make your own deal.
Nice move! But you can only pimp your own property so much, and most of us do not have structures just sitting around. I'll be investing ~$20k in my ground floor unit in the building above gutting the kitchen, LR & bath, and cutting a door to the currently unreachable backyard for the use of that tenant. But I don't imagine my rent gain will exceed $6-800/mo. And the desperately needed re-siding job will add nothing in cashflow.
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