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Are Double-Digit returns too good to be true?

by Sam Perren

400 words (2 minute read)

Originally Published: 2013-11-23

 
sam

 

Hello!

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I was recently speaking with a potential joint venture partner. When I showed him the expected returns, he said 10% ROI sounds too good to be true!

Have to admit, I was unprepared to answer him. I guess as a real estate investor, and doing this for several years, double-digit ROI has become the norm for me.

I have spent some time thinking of an example to best illustrate this, and the best example comes from real life.

 

Consider your own home if you are a homeowner. You likely purchased it with 25% down or less, and used a mortgage for the rest.

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DOWN PAYMENT + 25 YEAR MORTGAGE PAYMENTS(average length of a mortgage) = FREE AND CLEAR HOME

So;

25%(down) + 75%(principal)+ 50%(bank interest) = 100% free and clear

To calculate ROI:

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ROI =

100% free and clear – (25%down + 75%principal+ 50%interest)

(25%down + 75%principal+ 50%interest)

= -33%

 

Assuming home values did not change in 25 years, purchasing a home and living in it costs far more than what it is worth. NOT a good investment.

Now consider the formula for an investment home:

25%(down) + 0%(principal and interest thanks to tenant) = 100% free and clear

So ROI formula:

ROI =

100% free and clear – (25%down + 0%principal+ 0%interest)

(25%down + 0%principal+ 0%interest)

= 300%

On this rental property, you made %300 ROI. Divide by 25 years to pay off mortgage and you have 12% ROI per year. So there you have it.

"With real estate investing, double digit returns are not only possible, they are INEVITABLE."

This formula gets far more powerful when you start to consider appreciation, positive cashflow, and forced appreciation(renovations that add value).

If you want double digit returns to become a normal part of your life as well, please give me a call, private message, or leave a comment below :).

Until next time,

 

About the author: Sam Perren has helped dozens of investment partners aquire real estate, representing over $16Million CAD in purchases with rental income of over $100,000/mo. If you'd like access to Sam's "deal of the week" please click here.