What's a good ROI on an investment?

 I'm often asked what I think an appropriate ROI for a particular investment should be. The answer is simple, everyone's idea of a good investment is different and there is no right or wrong answer. A good investment depends on a person’s age, risk tolerance, current wealth, education, access to resources, time, and more. Someone with extreme wealth or someone at a later stage in life might prefer a safe 5% return as they aren't interested in hitting home runs but rather preserving what they have for retirement or future generations. Other people may look to grow wealth through risky but potentially very lucrative deals- but be careful, there is no fast track to wealth.

 My philosophy on ROI is simple: with the available capital I have and the investment opinions available to me, what is the best return I can get considering risk, taxes, and level of personal involvement. Here's an example- Most people find flipping an attractive investment and would be happy making 10%-15% on their money, and while 10%-15% return is an excellent return by market standards there is a lot of risk and personal involvement that comes along with flipping a house. There is credit risk, market risk, construction risk, and more and you also have the countless hours you spend managing contractors, agents, and attorneys. You should ask yourself, “What are those things worth?” What if you had to ability to lend money to an investor and earn the same 10%-15% passively? What if all you had to do was receive interest payments on a monthly basis and have loaned at an LTV that gives you a significant equity cushion? Does it still make sense to flip the house?

When considering the difference between rentals and flips consider the following: Flipping is a JOB. Granted, it is a potentially high paying job, but it is still a job. You actively work in the business, your houses become inventory, and you are taxed as ordinary income. Rentals on the other hand are a totally different animal. You might generate a lower ROI on an annual basis however you can create equity by buying right, take advantage of depreciation and pay little to no taxes, and refinance over and over tax free.

For me identifying the right ROI is simple. I compare the returns of investments that are available to me compared to the risk and personal involvement. Most important, I have to like what I'm investing in or with whom.