Return on Investment in Real Estate

How does one know if he is getting good Return on Investment in Real Estate

Below is copy of my answer on Quora.

There are two categories I would like to consider

Residential & Commercial

Residential traditionally should give you 3% returns. Smaller units will give higher returns, while larger & costlier units will give you slightly lower returns.

Commercial:

Office space typically is leased at 8-9% gross returns, while some retial spaces can get you higher returns of 10-11%

In places where there is a huge vacancy and low demand you can get as high as 14% returns. however, this would be very risky – In case the tenant vacates, you will have a tough time getting a replacement.

Key points to consider:

  • Smart (and greedy landlords) typically rent high and try to palm off the asset at higher valuations. Do you research well in the area before buying.
  • Residential is less hassle and also get some appreciation in the long run. This is almost non existent in commercial properties, where the rent decides the price.
  • When inflation is high, and bank rates are high, people would rather keep the money in the bank. When the inflation is low is when there is an increase in demand for real estate (as the returns are higher than bank rates)
  • residential is more or less neutral to inflation as rental demand is always robust irrespective of recession, bank rates, etc. just do your research well before buying.

hope that helped!!