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February 01, 2022

Just what makes a "good" real estate investment?

A “good real estate investment” can mean different things to different people. But, when you're talking money at least, you're looking for a reasonable return on the money you put up.

What that means is that if you're going to put your cash (which includes your down payment and closing costs as well as reno expenses) into real estate, your net worth should improve by a greater amount than if you invested in a similarly risky asset, says Leonard Baron, author of Real Estate Ownership, Investment and Due Diligence 101 – A Smarter Way to Buy Real Estate.

And simply hoping that markets will go up and up doesn't always work out, he caustions.

For example, if your property rental income minus expenses produced $250 per month positive ($3,000 per year); and your invested cash equity was $50,000, that’s a cash on cash return of 6.00% ($3,000/$50,000) and you'd be doing pretty well.

To add to that, let’s say you project net appreciation in value contributing an extra 1% or 2% return per year (after subtracting your projected estimated costs of capital repairs and improvements). Summing the cash flows and net appreciation could equal about a 8% to 10% projected return per year on a long term basis -- which would be great in this environment. 

If the net rental income is very low compared to the purchase price, however, you run the risk of negative cash on cash returns over time. Even if it appreciates 2% per year, you're typically just breaking even or worse ... not a deal most experienced investors would take, he declares

When it comes real estate, do you crunch the numbers this way? Or are you just hoping that price appreciation over time will do the job? Or is it the tax breaks that appeal to you?

By Gordon Powers, MSN Money




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Gordon PowersGordon Powers

A long-time fund company executive, Gordon Powers now heads up the Affinity Group, a financial services consulting firm. Gordon was a personal finance columnist for the Globe & Mail for many years, has taught retirement planning...

Jason BucklandJason Buckland

The modern-day MC Hammer of money, Jason can often be seen spending cash that isn’t his with the efficiency of a Wilt Chamberlain first date. After cutting his teeth as a reporter for the Toronto Sun, he joined the MSN Money team with...