Real Estate Investment-4
Cashflow, in turn, will allow to calculate the property’s expected rate of return (ROR). Rate of return is a measure of profitability; it measures the cash that a project will generate vis-a-vis the cash that you have to put into the project.
You’ll need a spreadsheet or a real estate evaluation software to calculate this ratio. It’s highly useful because it allows to compare the return one is expecting for the investment vis-a-vis the return one would reasonably expect for other, dissimilar investments. For example, if one runs the numbers for the property described at the beginning of this article and it kicked back a rate of return of 8% I’d surely pass.
One can expect to get 8% investing on the stock market (lower risk, and a whole lot less effort). For the risk and effort one would have to put into this project, expectation surely would be for a rate of return well north of 20%.
