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By The Numbers…


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It seems that the US does stop for 4th July celebrations for about a week or two … go figure! But, just when I was beginning to think that the 7MITs feel that they have enough to go on without our help, Jeff pops up with this interesting post … for all of you with real-estate and/or stocks in your future, what’s the huge breakthrough that Jeff has discovered?! It’s right here in his post …

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As a quick recap…

  • My life purpose is to “Lead and develop leaders.”
  • My number is 10 Million on 1/1/19
  • My current Net Worth is $672,290
  • My annual required compound growth rate is ~ 30% +/- a couple %.  I’m finding this number is fluctuating a bit, but seems to average out to right around 30%.
  • My selected growth engine is real estate investment and individual stocks

According to Masterson’s Table I should be able to generate ~ 30% with my growth engine.  Over the past couple weeks I’ve been researching both elements of my motor to determine whether I believe Masterson’s results.

What follows are my predictions, guestimates and silly wild a$$ guesses as to what I might be able to expect in annual returns and its affects on my number.

Now I make no claims as to the accuracy of these results.  Remember, it’s product of my research online and work with a calculator.  I welcome all comments and corrections.

Real Estate: In this first round I only considered residential real estate.  I need to repeat this exercise for commercial real estate and hope this post will generate some discussion in that regard.

In my analysis, I initially considered my returns as a percentage of the property value.  Then it dawned on me that my actual growth should be determined by how much of my own skin I have in the game.  In other words my returns are a function of the down payment I put into the property.

I assumed I would be buying properties in the $150K range with 20% down (i.e. $30K).  I planned for a 30 year loan at 6% and positive cash flow with an anticipated holding period of 10 years.  Tax benefits and purchase discounts (e.g. good deals, foreclosures and tax liens) were NOT considered.  I view them as icing on the cake.

Bottom line for me: the business fundamentals of the property must be sound before I lick the icing.

Vs. Property Value Vs. Down Payment
Appreciation 5.0% 25.0%
Cash Flow 4.0% 20.0%
Mortgage Pay Down 1.0% 5.0%
Totals 10.0% 50.0%

10% is nothing to sneeze at, but when you compare the returns to the amount of money I’d potentially be investing (the down payment), it quickly becomes apparent why real estate investing can be so attractive.

Individual Stocks: When it comes to stock investing, I’m going to stick to the value investing principles made famous by investors such as Warren Buffet and laid out in books like Phil Town’s “Rule #1”.  I will be doing my stock analysis centered on the requirement to make 15-20%.  Also many of the stocks I anticipate investing in will likely pay dividends on the order of 3-5%.  Putting the two together, I think I can possibly gain 18-25% annually with this approach.

Revving the Engine: Simple math here throws out a potential annual return of 68-75%.  Wow!  That’s basically double what Masterson came up with.  I’m not claiming Masterson is wrong, but if I were writing a book, I’d probably low ball the results a bit hoping that most folks would see better than published results.  I’m hopeful that was his approach.

Pulling My Little Red Wagon: If I hook up my growth engine to my little red wagon, I can begin to see how achievable my number really is.  Here I projected my current net worth ($672K) out to where I think it will be on 1/1/10 based upon my recent growth rates, then started running the math on an annual basis at 68% growth.

Date Net Worth
1-Jan-10 $773,133
1-Jan-11 $1,298,863.44
1-Jan-12 $2,182,090.58
1-Jan-13 $3,665,912.17
1-Jan-14 $6,158,732.45
1-Jan-15 $10,346,670.52
1-Jan-16 $17,382,406.47
1-Jan-17 $29,202,442.87
1-Jan-18 $49,060,104.02
1-Jan-19 $82,420,974.75

This of course assumes my entire net worth is fed into the engine.  I can tell you right now, I don’t have the intestinal fortitude to pump it all straight into the machine.  Although it would mean reaching my number in about half the time I’d planned.  That’s a plus!

Another way to look at the numbers is to ask the question, “How much of my net worth do I need to feed the growth engine in order to hit $10M by 1/1/19?”  The answer to that question is 49%.  I can live with that.

My profile then begins to look like:

Date Net Worth
1-Jan-10 $773,133
1-Jan-11 $1,030,740.92
1-Jan-12 $1,374,183.79
1-Jan-13 $1,832,061.83
1-Jan-14 $2,442,504.83
1-Jan-15 $3,256,347.44
1-Jan-16 $4,341,362.40
1-Jan-17 $5,787,904.35
1-Jan-18 $7,716,434.09
1-Jan-19 $10,287,549.92

Conclusions: I can most likely use a combination of real estate and stock investment to reach $10M by 1/1/19.  I should anticipate returns on the order of 30-68% and be ready to commit between 49%-100% of my net worth to this investment strategy.

What do you think of my analysis?

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Reader Comments

Jeff, great analysis.

don’t forget to factor in the growth rate of those 3-5% dividends, if you plan to look at your stock investing as a perpetuity, you can add the growth rate to the yield and get double digit returns on stocks like PEP and KO. I would also encourage you to put in more then 49%, we are about to exit a recession, get in now (or within the next 1-12 months) while prices are still cheap.

How do you get to your annual growth rate of 68 to 75%?
If real estate has a 50% growth rate and stocks have a 18 to 25% growth rate, the total growth rate depends on the mix of these two investments.
This is because money you invested in real estate cannot be invested in stocks at the same time. Therefore, your annual growth rate is somewhere between 18 and 50%, depending on the mix of investments.
Or is there something I’m missing here?

Adrian – Guilty as charged. 🙂

Thanks for the comment Josh.

My Net Worth is all in at this point. Very little is in Cash (<10%). I'm in two houses (one's my residence, the other a rental) and the rest is in a smattering of mutual funds which are mainly indices.

The 49% meant specifically to the real estate and individual stock strategy. By my math, my net worth is from the following areas:

Cash – 7.3%
Individual Stocks – 0.16%
Mutual Funds – 22.5%
Home – 31%
Other Real Estate – 34%

I am violating Adrian's 25% net worth rule on my home but we've discussed that previously and the reasons behind it. I guess at this point I currently have more than 49% of my net worth already committed to my growth engine (65% in REI).

One thought I've had over the last 24 hours is can you really "add" returns like I did? Or is it more of an averaging excercise. E.G. Assuming equal investment amounts…(Real Estate returns + Stock Returns) / 2 = actual returns.

If that's the case (which I think it is upon greater reflection) then my Number Effects analysis is incorrect and needs revisiting.

So…any thoughts on expected returns from commercial real estate? Adrian I think you'll probably have some good insight into this.

Oh AJ, I almost forgot to answer your question at the beginning.

I’m going to go out on a limb and say the break through you are referring to is “The power of leverage.”

Definitely the secret to investing in real estate is the power of leverage. Such a fine return for your down payment.

I like how you separated those out Jeff, very nice!

My chosen vehicle is of course going to be heavily in real estate and stocks as well, but I guess I never banked on getting returns that high on those investments. If I can match or come close to your figures Jeff, i’ll be done with my numbers a few years ahead of schedule!

Do you plan on refinancing your home and rental soon in order to pull out all that equity so you can put it to work for you?

I do want to revisit the additive returns bit since I’ve been pondering it all evening now.

Assuming that the numbers I arrived at are correct (that’s a big assumption, I know)

REI = 50% and Stocks =18%.

Then if an equal investment is made in each, I think the total return might possibly be (50+18)/2 = 34%.

34% is pretty darn close to Masterson’s Table. Maybe he was right after all.

If that’s the case, my number profile shifts a bit and requires me to commit 100% of my net worth to this growth engine.

1-Jan-10 $773,133
1-Jan-11 $1,035,998.22
1-Jan-12 $1,388,237.61
1-Jan-13 $1,860,238.40
1-Jan-14 $2,492,719.46
1-Jan-15 $3,340,244.08
1-Jan-16 $4,475,927.06
1-Jan-17 $5,997,742.27
1-Jan-18 $8,036,974.64
1-Jan-19 $10,769,546.01

Conclusion, my number is still achievable.

@ Thomas – You are 100% (or is that the square root of the hypotenus?) correct! And, because I didn’t approve this comment in time (I have to approve all first-time commentors) Jeff managed to come to his own similar conclusion.

@ Jeff – Now, there might be better mathematicians amongst us, but my elementary (well, second year College, before I discovered spreadsheets and decided I didn’t need to learn to do my own math any more) tells me that you would apply a weighted average; an example might help:

Let’s say that you keep 20% of your, say, $100,000 net worth in cash at 4% return; 50% in real-estate at 20% return; and the remainder (30%) in stocks at a 12% return. Then it’s easiest to calculate your return by analyzing all of the component return and then adding those up e.g.

$20,000 cash @ 4% = $800 ‘return’

$50,000 RE @ 20% = $10,000 ‘return’

$30,000 stock @ 12% = $3,600 ‘return’

Adding those returns up = $800 + $10,000 + $3,600 = $14,400, which is 14.4% ‘return’ on the full $100k … at least, that’s how I would do it 🙂

Now, you did win the prize – almost – because you are right, it is the power of leverage: you calculate the return that you get on the cash that you put in; this is called a cash-on-cash return and it’s pretty much the only one that counts!

Finally, I would like to see your Craig’s List ad modified slightly to actually state how many and what types of property; RE etc. that you would own and when … in other words, simulate your purchases and sales on paper and see if it looks manageable/achievable (i.e. you don’t have to buy 1,000 properties, etc.)

@ Adrian – That is closer to the level of return that I was estimating, 12-14% using RE and stocks.

The trouble that I have with Masterson’s table in conjunction with the annual compound growth calculator is that when we are using those, we are putting our “current net worth” in that required annual compound growth calculator as a starting point, not necessarily actual ‘cash that can be used for growth’, and making the calculation.

The trouble is, 20% of all this equity in our properties can’t be touched because it’s in our properties. Even if we refi, we can only take out the amount above 20% equity, not to mention, even if we are following all of the financial rules, the 20%, 25%, 5% rules, much of our networth would still be rapped up in stuff that either does not appreciate or appreciates slowly(this is why these rules are so important to follow, I know), at or slightly above inflation, like real-estate. Also, some of the MIT’s have a ton of their networth locked in 401k’s that would be lucky to cruise along with a 10% rate of return. This can be taken early of course, but beaten and penalized to death with fees and taxes, thereby cutting the return significantly, unless you found a couple of wonder penny stocks like Josh did.

It’s as if that calculator was designed for someone who has all of their networth in ‘cash’ and the calculation along with Masterson’s table together are saying “ok, now take that cash and begin to do ________ with it from this moment forward to get this 45% compound annual return”.

So, should we even count the “stuff” that we have in our networth or even 20% of the equity we have in our properties in that calculator if we want to get a more accurate calculation?

@ Scott – Great observation! Using the method that I outlined (incl. Michael Masterson’s tables) to help you select a Growth Engine is probably OK, but to then see if you can REALLY reach your Number using it, you need to look at reality, not theory. This means starting with available investment cash and then looking at what you can realistically do with it … the real purpose of the Craig’s List exercise: ‘reality internet’ at its finest 😉

Hey, we’re supposed to be motivating and up lifting. I want sunshine and blue skies. No more rain clouds Scott! 🙂

I don’t think the 401K is as “locked” as we’re implying here. You can roll that thing over into a self directed, traditional IRA and then invest it in any manner you desire.

As an example, I have one of my IRA’s at a brokerage and can buy individual stocks with it. You should be able to do the same by rolling the 401K over. I’m sure plans vary by employer, but I’d be surprised if you couldn’t do this with most plans.

LoL, sorry Jeff, i’m usually one of the one’s that paint all blue skies and rainbows, hehe. I’m just really trying to figure every detail of this out to make a very accurate roadmap to ye ole’ number!

I didn’t know you could self direct the retirement account, that’s much better.