Conduct a “return on investment” review of your rental real estate

If you own or are considering owning rental real estate, do you know how to gauge the risk and reward of this particular asset in comparison to your other investments?

Number 11 from 32 Financial Items You Need to Address EVERY Year says:

"Conduct a “return on investment” review of your rental real estate. Understand the risks associated with rental property. When calculating your return on investment, factor in the main risks of the investment versus a comparable investment in a stock portfolio, for example. Those risks include illiquidity risk (how quickly you could sell the property if need be), market risk (exposure to the overall real estate market), and lawsuit risk (you’re unlikely to be sued over a stock portfolio, but much more likely to get sued by a tenant or neighbor of your property).

Because investment rental property involves a higher degree of risk than other types of investments, you should demand a premium on its return versus the return of another, safer investment. For example, if you expect an 8% annual return on your stock market portfolio, you might expect as much as twice that return from your rental property investment to cover the additional risk you are assuming.

Devise a schedule for tracking this. If you file a Schedule E with your federal tax return, use this as a starting point as that will more often than not be where rental expenses, depreciation, and income appear annually."

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