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Determine Target Return

This is a highly subjective number. Everyone's tolerance for risk, effort, and opportunity cost are different.

My low number to consider with baseline assumptions is ~ 25% after 5 years and ideally around 30% or 35%. Some rationale:

  • Concentration in one asset = higher risk = need to seek out a higher return

  • Margin of Safety = because of said risk, I need a higher target return in case something goes wrong

  • There is additional work that goes into direct real estate investing and the return compensates for that risk

  • Stocks historically have done 8% to 10% per year, so to me shooting for 2.5 to 3x that is reasonable bogey... after all if I don't invest this in real estate I can just buy stocks

The last point is what I want to key in and is something the REIF Model can map out. The value of compounding at higher rates is a beautiful thing.

In this example you can see how a $70k investment is worth about double in 5 years than it otherwise would be in an average stock return environment. $200k vs $100k:

Whatever you decide your return is, it's important to find the right number for you. Maybe you don't mind the work, hate the stock market, and believe the asset has little risk. In that case you can lower your target return to 15% or whatever and vice versa.

In any case, once you have your number it's important to use a baseline scenario and not pie in the sky dreams. I like 5 years as a target because it gets difficult looking much further out and after 5 (depending on rates) I might be able to cash out a portion of the value.

However you decide to look at it, the REIF Model can give you the numbers to analyze the property and make sure you hit your target.


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