How to Invest in Commercial Real Estate

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Episode #060 - HOW TO EARN 40% on Your Money!

by Criterion, Braden Cheek, Brian Duck
May 2nd 2022

"Compounding Interest is the 8th wonder of the world." - Warren Buffet

Today our hosts Brian Duck and Joel Thompson with The Criterion Fund run the numbers on how you can earn 40% compoundin... More

start early. If you're listening start early and just get money invested. Whether it's at 10% 5% 15% get your money in. Most people though they don't have a sense of that delayed gratification. They want that everything now. They want to do the vacation now. They want to get that that car now. They want to get that Starbucks freaking $7 latte with two pumps of pumpernickel, whatever they have in that flavoring, whatever it's $78 drink that's costing them. All right, welcome to how to invest in commercial real estate. What is up guys? I'm brian, this is Joel. And for those of you who view us, you'll notice that Brandon's not here today. But today we've got a great topic, Joel had a conversation with his staff about investing and uh we're gonna talk about that a little bit. I think people are gonna be amazed with some of the numbers we come up with today. Yes. Certain people may not have heard the statement that that Warren Buffett I think once said is that compounding interest is the eighth wonder of the world. And I really don't believe people have a good idea of how powerful compounding interest is.

So hopefully today we can kind of enlightened people maybe open their minds to the possibility of what a good return over a long period of time can do for them, not just compounding, but if if that rate that average rate that you get that's compounding the higher that is that's that that's where the magic is reduces the numbers. Yeah. So so what if I told you brian that I could make you 40% of your, what's your first gut reaction? I would say B. S. Yes. And why is that? Because uh nobody makes 40% on your money do that because when I put it, you know when I look around the stock market makes Maybe 10% and And just savings accounts make 1%. So 40% seems unrealistic to me. Yeah. So we've been conditioned by society to think if if if returns are higher than a certain level that it must be too risky, risky, too risky. And so let's talk a little bit because I did have that conversation with my staff recently and I just I kind of tried to pose the question And the amount a little bit different. But let's say today because our minimum is $25,000 for the investment for you listening, if you have $25,000 to invest.

You know, what are the options that you have? What are you thinking about doing with that money? Because everybody has different risk reward profiles. Some people want to be safe and secure. Uh And so options for them are like savings accounts account. Well, for those listening that that earns you between zero and 1% today, it's gonna go up, Alright, Feds are increasing the federal funds rate, It's going to go up $250. Yeah, I mean it's not gonna do much. Okay. And so then you could do a cd and something for those who don't know what a cd is. You you just kind of guarantee the bank can hold your money for a certain period of time. And for that that that security for the bank that they know you can't withdraw. You get a little premium. It's a certificate of deposit maybe you get Right now, maybe you get rates are going up but maybe three or 4% or something. Probably not that hot. Yeah. You know next I would say are like bonds, you know us treasury bonds uh 10 years going it's about almost three now. Uh Corporate bonds could do 45, Maybe six or 7.

Uh So then what's the next step? Most people, I would say I'm gonna throw a number. It's probably not even accurate, 80% of people just put money in there in the market in their four oh one K. Mutual funds which is a great option. And I'm not downplaying mutual funds. If I was giving advice to somebody that didn't want to do real estate and they wanted to be in the market. I would say hey get an S. And P. Index fund, a lo fi s and P. Index fund because that beats, you know more than half, if not, you know, two thirds of active managers. I agree with that for sure. And so what can they expect when they do something like That? Probably on average around 9% a year. Yeah I would say 8, 10 some years it's going to be higher obviously some years lower some years it's gonna lose money. And that's what makes people afraid to do some of these things right? There's a little more volatility in stocks and there are some other things. And so I want to talk about that the the shorter the time frame or investment window that you have the riskier it is to nail down that nine or 10, the longer you have, the less risky it is if you told me you're going to invest for 40 years in an S.

And P. Index fund, I'd say you're good to go with 10 12% okay over time and we have 100 year history on the stock market. That's what it does over time. Uh now that is an account for inflation or anything like that. That's just that's just the bare bones of it. So uh we wanna well let me get into this. Okay so let me let me try to post some questions. I've done this before. But let's say you have $25,000. The next thing I want to go over and I wish I had a white board to show people on on this Youtube podcast but most people are listening so they don't have that access. So let's say That you are 25 years old and you have $25,000 and you want to invest for your retirement when you're 65. Okay. And and so those listening think about $25,000 and we're going to do an exercise. So if you invest that at 10% compounding yearly, okay, you invested one time, one time, one time literally You you invest it and forget it. Okay. The numbers would change drastically if you contribute yearly. But let's say at 25 you you flip the house or something, you got 25 grand, you invested 10%.

What does that give you when you're 65? And the number is make sure you get this right? $1.15 million. one million. 150,000. That's good. Uh, you know, in 40 years, not quite enough to retire on because I think if you did an inflation calculation that in 40 years the one million is going to be worth half. Okay. Maybe some people could retire on that, combine it with social security. Okay. What if you waited, which most people do 15 years and you said, Hey, I'm growing a family. I'm not making enough money. I'm saving for a house. I'm not gonna start investing. I'm gonna invest that same amount when I'm, when I'm 40 years old. Right? Which is, I would say most people probably start getting serious about it. 35, 40, that drops your 1.15 million to a mere $270,000. So just yeah, just that time you you cut your investment, your your total by 75% by waiting that 15 years. And so that's how powerful the, the the time horizon is.

Start early. If you're listening, start early and just get money invested, whether it's at 10%, 5%, 15%, get your money in. Uh most people though, they don't have a sense of that delayed gratification. They want the everything now, they want to do the vacation now, they want to get that that car now they want to get that Starbucks freaking $7 latte with two pumps of pumpernickel, whatever they have in that flavoring, whatever it's $78 drink That's costing them. Okay, let's see how much it costs them though. If they get 20% of their money. So Let's say that you you were a really good stock trader or you went into a really aggressive mutual fund and you could average 20% a year. How does that change? Remember? Uh, 40 years at 10% got your 25,000 to 1.15 million. All if you double the rate of return. Now you go from 1.15 million to 37 million. And I did try to double check these. I'm sure everyone will.

If I got it wrong, I punched in a number wrong, I'm sorry, but the difference is going to be drastic regardless if I have it right or wrong here. 1.15 million at 10%. 20%. 37 million. Right? And here's the here's the greatest thing when we're talking about big interest or a big investment return numbers. If you waited that same 15 years But you were still able to get 20% return on your money, okay. 2.4 million when you retire. So by waiting 15 years, if you have an, uh, an ability to get 20% of your money waiting that 15 years. The difference on that 25,000 is 2.4 million to 37 million, like 15 times 15 times. That's that's that's incredible. It really is incredible. And just to think we've done a show like this before, But the 10% for 40 years is 1.15 million. I think it 11 little over one million to 37 million just by doubling your rate of return. This is making me feel really bad because I'm almost 65 and I don't have anywhere near that much money. Well, we're on our way.

I've been investing my whole life was a failure. The show was though, what if I could show you a path to get to 40 and I can already hear everybody talking Joel, You can't do that. People have been telling me, I can't do stuff. My entire investment. Okay, Maybe you could do that one year. Maybe we'll get lucky and do it one year And I'm okay with that, right? I'm okay, but I'm gonna but it is possible. Don't tell me it's not it's not possible. And I'm about to show you how it's possible right now. Okay, so here's the example today. If you're listening, we're going to go out and buy $1 million dollar building, commercial real estate building, it's a cash flow building. And the numbers are the same. If you want to know these numbers for a five million or 10 million, just take it times five, take it times 10. Does't matter. And uh this building is an 8.5 cap and we're not going to review all that here, but that's the capitalist capitalization rate and it means if we bought the deal all cash, it returns 8.5%. So if we paid a million dollars for this building, we're gonna get 85,000 in cash flow. Okay, so 8, 8.5 cap and and I'm I'm buying I'm under contract to buy like three or 4, 8.5 cap deals right now.

So don't tell me I can't find an 8.5 cab deal. Alright, so a million dollar deal, I'm gonna get an 80% loan Now, the numbers get even better if you get a higher LTV, which we have done, we get 85% routinely. But if you just got an 80% loan, $200,000 is your down payment. Okay, so that's what all of our investment investment matrix are going to be based on. Is the $200,000 down payment? Once again, I know people are gonna say, well Joel, What about closing costs? I get it. Okay, you're going to have, you know, 10,000 of closing costs and you're gonna need some operating capital. That will change the numbers a little bit. But all I would have to do to counter that is to say, well, I found an 875 cap deal and now I took care of. So Right, right, okay. So the loan payment on a 25 year am at four and a quarter, Which interest rates going up, but we're still getting four and a quarter. So the payment is $52,000. Okay, 52,000 a year. Right Now. Remember our cash flows 85 and now we've got a debt payment of 52.

So the difference is our cash flow and that's 33,000. So 33,000, uh we're gonna put that over our down payment to get our return. So we put 200 in and, and I call it a money generating machine, we put 200,000 in and it spits out 33,000 a year every year. Uh and that equals 16.5% return. Okay, that's pretty good. That's really good. And uh for the naysayers, I like to counter their points even though they're not here to have a discussion with me. Yes, cash flow is not guaranteed. And it kind of can go up and down, but yeah, could it go down a year. Sure. But as interesting as rates, rental rates go up, it could Go up and in fact it will go up over time, over time, if you have a good property rents will rise and cash flow will increase. Because remember my loan is fixed for 25 years. Well, Okay, It's only fixed for five or 10 years depending it's advertised for 25.

So you you to say that you're gonna have a guaranteed loan payment for 25 years is a stretch. We have a property that started at like 12% cash on cash and it's up to 25%. And so, well, for now let's just say that rising rents uh offset a rise in interest rates in five or 10 years when we re fi alright, so next the cash flow isn't the whole return on a commercial real estate deal, we're have a debt payment. And part of that is interest. But part of that is principle down, We're paying the loan down which is increasing our equity and whenever we sell, we get that money. And and so I I did the math for us, eight, the of the $52,000 loan payment, 18,360 of it is paying down the loan or increasing our equity and it's not a return that we put in our pocket, but it is a return that we will get in the future. And so, uh, let's do that math. I put 18,000 360 over the 200,000 that I invested.

That return is 9.2% a year. Just in equity build up. So think about that guys, if you had a commercial building and you wouldn't want to do this. But if it was a break even deal, no cash flow, the amount of money that you're theoretically making and paying down the loan is already equal to what most years give you in investing in the stock market in the S and P and NASDAQ or down well. And that's just the first year. That's the first year when the principal payment or the yeah, the interest payment is the highest. Right? And that's very, Very good point that the first year is the lowest that you're going to pay down the loan every year. That gets bigger. So the nine is going to go to 10, 11, 12. This return is going to get better. Not worse. So theoretically you've got your cash on cash increasing every every year you've got your your equity increasing every year. So guys, we're already at 16.5% on cash on cash, year one, we are 9.2% on principal reduction. Now, what else is there? Well your property is gonna increase in value.

Yes the property is going to go up in value. Uh We don't know how much but we were going to pick a number and I pick for this example I use 3% 3% On average nationally is pretty conservative. There's probably some markets that have some down years that are lower than three. But I would imagine the average is going to be way higher uh nationwide than 3% right now inflation is like 89% and Inflation is rarely zero Or rarely lower than zero. And so yeah, you may have a year that's two or one. But you're also gonna have some years that are 678 right? Uh You know we have a property that we purchased four years ago and were under contract to sell it at almost double and so I don't know I didn't do the math for the show but we're probably 20 you know 15 20% year over year. Now that that's a unique case but just 3%. So let's do that math 3% over a million dollars which is the starting value is $30,000.

And yes, that isn't going in my pocket. Okay. But it is there it's part of the return and five years 10 years from now if you're averaging that then you're definitely gonna get that money or at least some version of it. So I took that math. 30,000 over 200 the the return on. Just the appreciation is 15%. So let's add those up. You got 16.5% cash on cash, you've got over 9% and equity build up or loan pay down and we've got 15% in appreciation for 40%. So for everybody that saw the title Make 40% on your money a year. Uh and they don't believe it. I'm here to tell you, we do it, we do it every day. Uh And and that that's at a four and a quarter interest rate. We we have those, we I just refinanced the deal at 3%. Now, that was right before interest rates started rising. But I mean it's not like four and a quarter doesn't exist.

It's not like 8.5 cap deals don't exist. And 40%. If I've rolled this out, five years. The principal pay downs higher than nine. The appreciation might very well be higher than 3% a year. And the cash flow is going to go up because of rising rates. So we could even do better than the 40. Okay. So let me do a thought experiment and I know you can very few people on the planet Uh would ever be able to achieve 40% a year for 40 years. Okay. So I'm not saying that someone's going to do that. I just want people to be able to open their minds to the power of how important it is to get the highest rate of return on your money possible. And if you invested $25,000 at 40% a year compounding for 40 years. uh take a second. If you're watching think of the number I guarantee you don't know it. I don't even want to I don't even want to try to guess. Uh if if if the online retirement calculator in my Excel spreadsheet were correct. It's $17.5 billion 17.5 billion billion 25.

A one time $25,000 investment. That's amazing. And that's why the war above it said it's the 8th wonder of the world Guys. That's why we are trying to encourage you to invest in real estate. It is such a powerful tool. I don't know anywhere else that you can get 40% on your money. I don't know. And and once again, I'm not taking like a pie in the sky example. This is an example. It's on $1 million deal. It could be on a $10 million deal that I could do this example for the $16.5 million deal that we did in Vegas that I'll have to redo the trillions, let's get into the trillions. But uh, but you can make 40% on your money, even if it's only for a five year window, and then you sell it and you have to wait another year until you find another 40%, uh, potential investment. But this is why it's so important is we've already demonstrated how waiting 15 years destroys, your returns right, averaging a low percentage on your money, destroys your returns. And and here's the thing that this whole show is about, it's about opening your mind to understanding what's possible.

Because if all you've ever heard is that investing is risky. That high returns mean, mean, high risk, You're not going to look for a 40% return investment, you're not going to look for it. And so you're never gonna find it, you're never going to invest in it. You're gonna forget about as soon as you hear, it's 40% unclaimed. Yeah, You're like, that's not real, that's fake. Now. There's scammers out there, that, that will tell you that they're gonna do 40% all day. Uh, and we don't pitch 40% of our investment. You know, we're taking a percentage were syndicating, But we've consistently hit 20% for our investors after we take our share. Uh Huh. And we've been paying 20% compounding to our investors on multiple deals for years. And so for everybody listening This, this shows the demonstrates the strength of commercial real estate. It demonstrates what's possible, uh, you know, in, in the return metrics to get 40% versus 20% versus 10% most people, they just go to their job. They have an investment advisor come in. They say you need to be diversified. You need to invest in all of these mutual funds For the long term.

And they've averaged 8% a year. And that's the safest thing you can do. And everybody, what do they do? They start contributing to their 401K. They flip their little brain off. Well, they told me I could, I just have to invest and I've set aside this much money and then I'll be able to have enough to retire and they never think about it again. Uh and so what we're here to do is that you can make 40%. You can do it consistently. You may even do better than that on some deals. Uh And and a higher rate of return and starting early will absolutely change your life. Those are some amazing numbers. Yeah. So, I don't know. I don't think I have much else. I don't know if people have ever thought about that. But real estate is a great tool. And we've demonstrated time and again that it it can provide higher returns with lower risk than most other investments that that average people have access to. Thanks. All right. That was great. Alright guys. Until next time. How to invest in commercial real estate. Hit the like button. Uh send us an email if you have a topic and subscribe to our newsletter. That'd be great. Thanks everybody.

Mm hmm.

Episode #060 - HOW TO EARN 40% on Your Money!
Episode #060 - HOW TO EARN 40% on Your Money!
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