What’s an asset that grows 12% a year ?

Question

I was listening to a podcast recently and they were talking about finding an asset that grows at least 12% a year. What type of assets could those be ?

Joshua McMillion · Answer

@Erik Henneman

Most likely, you are referring to return on investment or ROI. You can achieve this through REI by using the formula ROI=(Current Value of the Investment-Cost of Investment)/Cost of Investment). Historically, the S&P and returned 11.9% since its inception. For real estate, it depends on what your criteria are. Are you in a market like California that sees considerable equity growth? Or are you focused on both?

My crystal clear criteria are 10% or greater ROI% in an appreciating market, so I can leverage the full power REI has to offer.

Sincerely,

Josh

Darius Ogloza · Answer

Account Closed Back in my lawyer days, I helped a nonprofit try to recover $3 million "borrowed" and lost by a former CFO who had a sure-fire method of making a killing through options. Just saying . . . .

Ned Carey · Answer

@Erik Henneman some here may disagree but NO asset returns 12% every year. Some may average 12%, but market cycles cause all types of assets to go up and down. You also have to consider the risk of the investment. The greater the potential return, the greater the likely risk.

That said I think knowledgeable real estate investing is one of the best risk reward ratios of any higher risk investments. Done well you can get very high returns with very low or moderate risk.

Risk can mean multiple things. An investment that averages 12% a year, but happens to drop when you need to sell in 2 years isn't much Good. Some investment may have a high chance of loosing a little money and some a low chance of problems but the rare problem could be catastrophic.

Henry Clark · Answer

@Erik Henneman

Hello from a former fellow CPA. As you know you can make the same number look good or bad, its just a matter of perspective.

To help narrow down the above great inputs, if you could give us your perspective:

a. Why do you want 12% in todays economy? Beyond the obvious, its big. What is your personal/financial objective? More importantly how much risk are you willing to take on?

b. What is the magnitude of both financial and sweat equity investment you want to invest? $xx,xxx

c. How much are you willing to lose? $xx,xxx

Example of returns and risk:

1. We bought 8 acres for $200,000 ("off market" about to be on market the next day at the realtors office and he said hey, take a look at); not in the best location. Bought it in one hour after looking. Took a chainsaw in the middle of the winter and started clearing trees on 3 acres. Rented a skid steer and mulcher to clear trees. Hired some bulldozer work. Put a free firewood sign out front. Two years later per the appraisal, its worth $100,000 per acre. No it didn't cost $200,000. Lot of sweat equity and about another $20,000 in clearing costs. But what is the return over a two year period? Loss potential- $50,000

2. On that same property we did Self Storage. Used the equity above in a 10% SBA loan. Built a $1.6mm location. Appraisal came in at $2.4mm just for the storage on two of the acres, two years later at 30% occupancy. Still in the rent up phase. What is the return? Loss potential $400,000.

3. Everyone has this same story, just a different version. Bought 48 acres for $485/acre in 1993. Subdividing and selling for $40,000 per acre today. Was that planned, no. Partially yes, but not to those levels. Loss potential- $0; its where we live; just don't need that many acres anymore. We bought this location both to live, but also I could see the value of the location increasing over time.

1 and 3 above, if it was a business, you have to keep replicating. These don't happen and come along everyday. Plus you have to be able to "see" them and act on them

Item 2, we have $200,000 cash in. Once 90% occupancy we will be cash flowing about $200,000 per year. On a 20 year term amortization; although we will probably try to pay off in 10 years. So during that time "we" don't get any cash, but we build $200,000 equity every year. On an original $200,000 investment. Not counting what we plan to do with the other 6 acres. This is a planned investment. This is our 7th location out of our final 8th buildout/purchase. So it didn't just magically happen. A lot of errors and mistakes along the way.

Start small and Make Your Big Mistakes Early.

If you can answer A, B, C above, the above group can get you into a 12% return.

It could be a $20,000 trailer that you put $2,000 rehab into, and rent out for $800 per month, net of the lot fee of $500 for $300. What return is that?

Or, a $3,100 cargo container; that you rent out for $90 per month on rented ground of $30 per month. Net $60 or $720/year on $3,100. What return is that?

The above scenarios are in my world. The people above have tons of other options, with varying risk factors.

Literally while typing this post, my realtor just called and we have an offer of $87,500 on one of our 2 acre $100,000 listed lots. Its all about putting your efforts into "forward" motion.

Jay Hinrichs · Answer

Timber will give you a 12% return .. as long as you buy in well stocked and good growing sites in the northwest.

this is the basis for many insurance companies investing in long term timber .. and right now where timber prices exploded the returns are that much higher.. but in the long run 12 to 14% has been what the big insurance companies rely on for return on investment.. no granted there is NO cash flow.. but once harvested those are the returns they enjoy.. Also Harvard endowment is a HUGE NW timber owner. along with others.

Joseph P Finkelstein · Answer

It seems like everyone kind of hammered home the difficulty, or impossibility of finding an asset that consistently grows at least 12% a year. However, piggybacking off of @Joshua McMillion, The only way I know of taking an assent conservatively getting returns in the 10% range on equity is through leveraged appreciation when investing in property. The asset isn't growing by 10%, but the way your returns are from appreciation can get you there

Paul Moore · Answer

Hi @Erik Henneman. Typically, real estate returns come in four types, abbreviated CAPT. (Not a great acronym, but better than CATP! <say it aloud>).

C = Cash Flow. Cash flow is the operating revenue minus operating expenses minus debt service. Often in the range of 4% to 8% or so.

A = Appreciation. Appreciation is the annual growth of value of the property. In residential, the value is based on comparables. If it is commercial, the value = net operating income ÷ cap rate (unlevered projected rate of return). Appreciation often runs in the 2% to 4% range annually, but appreciation can be forced in commercial by adding value. Leverage can dramatically increase the appreciation of equity. P = Principal Paydown. For assets with debt, any payments that go to the bank that could have otherwise gone to investors are part of the return. This is received by investors when the asset is refinanced or sold and the debt paid off. T = Tax Savings. This is harder to quantify and is different for every investor. Here is an article I did on this subject. Real estate has among the greatest tax savings of any investment available.

I wish you the best, Erik! You are in the right place to learn more.

James Hamling · Answer

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Darius Ogloza · Answer

Bernie Madoff promised his investors 15% annualized guaranteed. Many lessons there.

Aaron W. · Answer

@Erik Henneman There are many ways to look at returns. @Joshua McMillion mentioned one way-ROI.

When it comes to real estate, returns come in different shapes and sizes. In addition to ROI, other common returns include but are not limited to: cash-on-cash return, cash flow return, internal rate of return (IRR), annualized return, equity multiple, etc.

Each of these returns are calculated differently and can give you different "returns". Investors emphasize certain returns over the other, many times due to preference or because one number is higher than the other.

Real estate can definitely provide 12% returns if you look for the right properties in the right places. But also keep in mind, those higher returns, especially in today's market, have trade offs. These higher returns typically will not come from turnkey properties and will require some rehab.

Good luck!

What’s an asset that grows 12% a year ?

What’s an asset that grows 12% a year ?

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