REAL ESTATE HURDLE RATE

What is a “hurdle rate,” and what does it have to do with real estate investments?

A hurdle rate is the minimum return an investor requires before deciding to pursue an investment. If the expected gain/return is below that threshold, the investor simply turns down the investment.

In real estate, investors often compare their hurdle rate against a property’s rental yield—the annual rent divided by the purchase price. If the yield meets or exceeds the hurdle rate, the property may be worth considering.

What hurdle rate is acceptable?

Some Filipino investors use time deposit rates (the "risk-free" rate in their perspective) or their asset portfolio's profit margin as their hurdle rate. It's important to remember that different investments carry different risks. Generally, the higher the risk, the higher the return investors expect.

Many real estate investors informally use a hurdle rate of around 7%, likely derived from adding a premium over relatively safe investments such as time deposits, which historically yield around 4–5% gross.

How feasible is a 7% return today?

With the rapid increase in property prices, achieving a 7% rental yield has become difficult.

Take a condo selling for Php300K/sqm. To reach a 7% yield, it would need to rent for roughly Php1,750/sqm/month—a steep rate even for luxury condos. In BGC, average post-pandemic rents are closer to Php800/sqm.

Looking at it another way, if a property can only rent for Php800/sqm, the maximum price an investor should pay to achieve a 7% yield is about Php137K/sqm.

This highlights another use of hurdle rates: they help determine a buyer’s maximum budget.

Some properties still offer higher yields. For example, certain QC condos selling around Php2 Mn can rent for about Php15K/month, translating to yields of roughly 9%.

But should investors always choose the property with the higher yield?

Not necessarily. Another factor to consider is capital appreciation. A BGC condo may only produce sub 4% rental yield, but if its value rises significantly over time, the combined return (rent + appreciation) may still meet the investor’s hurdle rate.