Real Estate Vs Other Investment - Bottom Line
5% is a common benchmark for a return on investment after inflation. This as a general benchmark for average returns, however as markets fluctuate year to year it's better to compare to a benchmark for the specific year. To calculate annual yield divide the net income (gross income after expenses such as mortgage interest, maintenance, vacancy etc) by the investment value (the cost or current value of the house) This should give you something in the single digits to teens %. Inflation can kind of be ignored because everything should increase at the rate of inflation together, unless say there's a regulation against increasing tenant's rent (there is in Canada).
A reason to calculate this rate is to help real estate investors decide if they should buy or sell at the current real estate prices. One might consider selling and rather buy real estate investment trust (REIT) or stocks that yield more for less work. There are a lot of fees involved with buying and selling real estate. Some people who pay a mortgage on a house choose to invest rather than pay off the mortgage if the numbers seem more advantageous.
There are also the 50% and 2% rules. Basically, real estate investors generally assume that net income will be 50% of monthly rent after expenses (taxes, insurance, maintenance, vacancy, interest etc etc) The 2% rule is that you should be able to get 2% of the cost of the property in rent per month. If you can't get 2% of the cost of the property per month then the market is likely overpriced. Of course, if you also live in the place you are renting out, these numbers don't really work.
Nothing is easy money. As a landlord your phone will be ringing off the hook from rental ads. You have to be very picky and do background/ credit checks, because once they're renting they have rights - evicting a tenant is not fun. You should have very good intuition and the ability to read people fast because they can lie or tell you whatever and there's nothing you can do to hold them accountable for lying. You can't just walk into their living space even though you own the place. Tenants also rarely look after the place like an owner would. That's why landlords assume 50% of rent will go towards expenses. Of course you can use a property management company, but you have to choose wisely here too, and they will further cut into your profits.
I rented out my condo for a few years and can confirm that it's a lot of work and that it's quite stressful at times as well. But it can certainly be a good investment. If I were to do it again I'd get a property management company to look after it.
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I'm running my own business and I find this useful. Thanks for sharing😊
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Great article. Real estate has historically tracked inflation. With low interest rate, my home in the Seattle area has seen massive increases. Our house went up in paper value a massive 15% last year! It's unhealthy.
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I absolutely agree with the author of article. I also rented out my apartment and in terms of cost I got exactly the figure the author talks about. Of course, it's great luck to find renters who won't turn your place into ruins, but that doesn't mean you have to take just anyone who can pay the rent. Personally, I had bad experience in the beginning, I was one of the "lucky few" who had to spend money on rebuilding, I went to estimating construction costs, if anyone needs it. Renting is definitely a good passive income option, but not trouble-free.