As Josh found out I like to put our 7 Millionaires … In Training! under the virtual ‘spotlight’ when they have an issue, question or decision of note. It doesn’t mean that there’s anything wrong, it just might mean an opportunity to examine their current strategy with all of our readers … you never know where the next Million Dollar Breakthrough is going to come from!
Scott is busy working on our next exercise [AJC: watch for more details in an upcoming post!] and realizes that he has reached a bit of a fork in the road:
I’ve been putting some numbers to the test the past couple of days. It’s funny, I had began getting elated because I felt like I would be able to easily get to my number a few years earlier at my current growth rate, but as i’m crunching the numbers on my plans and everything, i’m finding that I’ll ‘just barely’ arrive at my number in about 8.5 to 9 years = the exact amount of time left that I determined in my original 10 year plan, lol.
‘Barely’ scares me a little because – besides the obvious: Scott makes his exact Number of his exact Date [AJC: sure ... and, I'm a balding hippopotamus ], Scott is likely to:
- Overshoot his Number by his Date … yay!
- Undershoot his Number or delay his Date … potential disaster, IF Scott’s Number/Date is critical.
In other words the benefit of overshoot is far outweighed by the potential that he simply won’t make his Number by his Date … so, we have to do a little more work. I asked Scott to clarify, according to his current plans:
1. How many practices does he need? And, according to what opening schedule?
2. Did Scott also assume owning the properties and build in some allowance there?
I just ran the numbers again for:
Owning 2 clinics, the first one outright in 30 months of course and then getting another one off the ground in approximately 1 year after that by using 100k of my ‘war chest’ money to open the office. I’ll have around 150k ‘left’ in that war chest after using the 100k to open clinic #2.
I also factored in keeping my current rental property, getting it refinanced to get rid of the interest only scam mortgage that I currently have on it asap(jeez, I was so financial dumb when I bought that house) and factoring in an appreciation rate of 4% per year(this may be pushing it too due to the current market, but it is in one of the most sought after parts of the city for families), plus factoring in the $500.00 per month extra cash flow from that property earned to go into the war chest.
Factoring in purchasing both of the commercial properties that both offices operate in at estimated values of 300k with a 25% down payment and a 10 year mortgage term each and selling them at the end after enjoying at 6% per year increase in value for a few years(once again, this may be pushing it!).
I also factored in the cash savings along this trip to be getting 12%(dunno if this is realistic or not, but if we come out of a recession, I would think I could at least get that kind of a return on my accumulating cash by investing in a few good stocks??)
This took me to right at 4 million in about 9 years from now if I sell the practices off for their fair market values(around 300k each), sell the commercial properties that they sit on for a reasonable price, taking into account equity gained from regular mortgage payments and estimating the 6% per year appreciation, selling of the rental property and gaining a 4% appreciation each year from this year forward, taking into account equity gained from regular mortgage payments applied to that mortgage and adding this all to my number, AND on top of all this, getting 12% on the cash flow from these 2 businesses along the way by investing in stocks after the ‘war chest’ money was used to get the second clinic off the ground and down payments were made on the 2 commercial properties to acquire them.
So, here’s the picture: again, it’s very rosy in that just owning a couple of nice medical practices and plowing the profits into RE can produce an incredible Number, like $4 million in as little as 8 to 10 years …
… but, there are some risks:
- Scott just ‘barely’ makes his Number according to this plan, and
- there are some assumptions, particularly around the returns from stocks, that bother me.
In fact, I’m wondering – if Scott reran the numbers assuming just, say, 8.5% return on cash invested in stocks, and again at, say, just 4% (assuming the cash just sits in the bank) as a ‘sensitivity test’ … would that change the outcome dramatically? If Scott’s model is highly dependent on this return, then he really has a stock strategy to get to his Number, and that’s pretty speculative!
Now, the final piece of information that I need to share before turning this over to you, is that Scott COULD offer to buy his partner out of his existing practice now … Scott can’t be certain if his partner would sell or not, and for how much, but he’s estimating about $200k. This would:
a) pretty much eat up all of Scott’s savings – and then some – for the next couple fo years or so – hence, ‘kill’ Scott’s stock investment strategy, but
b) potentially allow him to open up his second practice now rather than wait for 30 months before the practice would otherwise just be given to him (saving him $200k in the process).
Now, Scott’s busy crunching some numbers on all of these alternatives, but what advice can you give him? How/where should Scott invest (business? RE? Stocks? All? None of the above?)?
Most importantly, which fork in the road should he take?