Investing By The Numbers, Part 1 ~ By Chris Anderson, Ph.D.
November 15, 2006
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In our recent Mastermind Group training session, our key topic of discussion was how to invest by the numbers. The longer that I spend investing in real estate and also evaluating projects around the county, the more and more I am astounded at the lack of knowledge from "so called" professionals. For most individual real estate investments, the level of analysis is not terribly difficult.. You find yourself doing the same thing over and over again. In this article, I will try and share this simplistic view and how you can know more than 95% of the "professionals" in this market.
What You Need To Know?
For any investment, there really is 4 things you need to know and guess what, NOBODY gives them to you in a normal sales presentation. Let's break down each one and how it is obtained:
How Do You Use This Information
Suppose you could see EXACTLY what was going to happen into the future... Of course, we know this is unrealistic however it still does not hurt to try based on our assumptions.
Suppose you looked into the future and you saw that in 5 years, your net gain on a property was going to be a little over $87,000 with a $21,000 dollar total investment and a little bit of your time. If you KNEW that was GOING to happen, what would you do? Would you purchase the property? Would you pass on the property? Why?
Realize, that for a $21,000 investment, this equates to making 33.9% on your money, year after year after year. That is not too shabby. Let's apply the "rule of 72" here which states that you can calculate how long (approximately) it will take to double your money with a certain return %. You take 72% / 33.9% = 2.1 Years to double your money. Is this something that is good?
The answer of course depends on a few factors but let's put it into perspective. Suppose you invested $100,000 at a steady 33.9% rate of return. In 15 years, then you have now turned that $100,000 into $7.9 Million. Got your attention yet if you KNEW this was going to happen? Of course, if we have to take on all kinds of risks to get that return, then that may, or may not be such a good idea. If, however, it is low risk, now you have the makings of a good investment.
My argument now is that IF YOU COULD SEE INTO THE FUTURE, and you saw this kind of performance, you would be excited. Right? Well, why not pretend we can look into the future and CALCULATE what the future looks like using our 4 KEY parameters above. If we like the "future" answers, and we believe our assumptions, and we believe the risk to be low, isn't that a prudent approach?
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