Apartment Investing – What Is a Good Return on Investment?

One of the most common questions I get from investors is, “What is a good return on investment?” or “What kind of return should I look for when investing in apartments?”

First, what is the definition of rate of return? Do you have one?

For many investors, the rate of return on investment can mean very different things. There is cash on cash return, cash flow return, return on equity, internal rate of return, cap rate, etc. I could go on and on.

The big question is: “Which one is correct?”

My answer: “Which ever one is right and applicable to you!”

Why this answer? Am I just copping out?

Of course not. The reason is that all of us look at apartments and commercial property differently. We all have a different point of view, life circumstances, investment goals, timing, etc. This is true whether you are investing with your own money, forming a partnership, or investing through a corporation. It is personal, in a sense.

What I recommend is that you decide what a good rate of return means to YOU, and not based on someone else’s recommendation. Of course, you can take others’ guidance into account, but in the end, it is up to you. Advisors are just that: they are there to advise you. Do not let them make the decision for you – whether it be an agent, broker, attorney, or even a family member. In the end, you must decide the rate of return based on the way that makes the most sense to you in your current situation.

However…

Always keep in mind that the beauty of investing in apartments and commercial real estate is that they have four ways to make a rate of return:

1. Cash Flow – This consists of both the monthly net income received, as well as the price when you sell.

2. Loan Principal Reduction – Every month your tenants are paying down the principal amount owed on the property.

3. Property Appreciation – This is something that cannot always be 100% counted on, as shown in recent history. But if you buy a property right, and manage a property well by focusing on increasing the Net Operating Income (NOI) the value will appreciate over time.

4. Tax Savings – The government has written many of our tax laws in favor of real estate investors, and you will benefit both while you own the property and when you sell. This is through the depreciation deduction, and through a tax-deferred exchange, respectively.

Keep these “Big 4” benefits of investing in apartments and commercial property in mind. This can drastically increase your wealth over time over simply investing in the most common vehicles, such as stocks or bonds. That is not to say to NOT own stocks and bonds, but to understand the benefits and differences between them.

Again, my overall direction is to think about what is most important to YOU. When you are analyzing deals and looking at properties, focus on the rate of return that best suits you at the time.

Your investing criteria may change over time, but the best thing is to decide the return ahead of time, and get out there and take action. Start small and work your way up to larger and larger deals over time, and you will do well.