Can he make another $5 million in the next 8 years?
By David S. J. Meng
Some friends said after my book: “Congratulations on your real estate investing. The past 8 years were great opportunities. You are lucky!”
Some friends kindly cautioned: “The past decade was a really good period for real estate. This cannot be repeated in the next 8 years, so be careful. You cannot make another $5 million in the next 8 years.”
Some friends are nice and are kindly concerned: “Has the golden time already passed? Is that why you wrote a book to make money, because it’s now becoming difficult to make money in real estate?”
Brian, a world-renowned scientist from Australia, was my mentor in the 1990s. He was a fatherly figure with a kind heart. When some colleagues or regulations discriminated against Chinese students and visiting scholars, he stood up for us and defended us. One time, with his leverage as one of the best scientists at the institution, he wrote a strong letter to complain to the upper management for police policies at the gate that did not treat visiting scholars well. In the 1990s, he spent a lot of time and wrote a book. As a poor student, I asked him how much money he could make from the book. To my surprise, he said that it’s very little, negligible, and much less than minimum wage for the time he spent. However, he said that if the book can help people, then it is worth it. The book was his way to give back and his service to the community.
Books are important. I have learned a lot and benefited tremendously from reading real estate books and other investment books. I am grateful to those authors who are willing to teach. Without them, I would not be where I am today. My hope is that my book can motivate some people to invest. It can help people to pursue in the right direction. It can help level the playing field so that they can receive a fair share of the financial reward for their hard work. It can help people to achieve financial freedom, and to avoid some costly mistakes and pitfalls.
So, what will happen in the next 8 years? No one can predict the future. I cannot predict the future. The following is a humble and reasonable estimate.
Real estate can produce wealth for the investor through several channels, including the following.
(1) If you live in a booming area where Housing price appreciates at 7%, 10% or 12% per year;
(2) You are very handy and hardworking and can do a lot of the repairs and maintenance;
(3) Leverage.
I live in an area when house prices have increased a modest 3-4% per year in the past 8 years. I cannot change (1). I do not have the talent nor time to do (2). So, the one thing that I focus on is (3).
I contact loan officers. I invite VPs of banks near where I live to lunches. I push the leverage cautiously to the maximum, with safeguards (as described in my book “$5 million in 8 years”). This can truly increase the rate of return safely and substantially, while spending the least amount of time.
Real estate requires leverage. Without leverage, the rental houses will have return rates not so different from the SP 500 in the long term, which is trouble-free. Then why spend all the time and effort to deal with multiple houses, repairs and tenants? To me personally, real estate is not worth doing without leverage.
The leverage helped produce an average of 27% annual rate for us in the past 8 years. We do not know what will happen in the next 8 years. But my wife and I will maintain the leverage, by pulling out cash from the rental properties whenever there is plenty of equity, to buy more properties, or to dump into the SP 500.
Earlier this year, my wife and I borrowed $560,000 from the bank and put it into the SP 500 in March and early April.
Currently we are doing cash-out refinance on two townhouses to borrow $350,000 from the bank. It is tentatively approved and still doing paperwork. We plan to put that into SP 500 too.
Every couple of years, we will pull cash out of some of the rentals and put into SP 500 for dollar cost averaging. We will hold for the long term for a couple of decades.
In this way, we will maintain the leverage in our rental properties. Rents and housing prices have gone up about 4% in my area this year, compared to a year ago. With our leverage, it will probably allow an annual rate of return of about 20% in rental properties. SP 500 yields 10% in the long term. So, between 20% and 15%, we can reasonably assume a mid-point of 15% overall.
With the $5.5 million as of the end of 2019, at 15% annual rate:
$5.5 million x 1.15**8 = $16.8 million.
This means that we will make (16.8 – 5.5 =) $11.3 million in the next 8 years.
Even at a lower rate of 12% per year:
$5.5 million x 1.12**8 = $13.6 million.
This means that we will make (13.6 – 5.5 =) $8.1 million in the next 8 years.
While no one can predict the future, in either case, we humbly and reasonably expect to make more than $5 million in the next 8 years.
Many readers are familiar with BayFamily and his bold proposal to make $10 million in 10 years. Some people doubted when he first proposed this plan. Eventually, he did successfully reach his $10 million goal, although it took about 13 years, a little longer than 10 years. But the important thing is that he did it. He reached the $10 million goal.
The math above indicates that it is possible for my wife and I to reach $10 million in 13 years too. From 8 years to 13 years, there are 5 years left:
$5.5 million x 1.13**5 = 10.1 million.
So, if we can have an annual return of 13% in the next 5 years, we should reach $10 million at 5 years from now, for a total of 13 years, the same as BayFamily.
This shows that the BayFamily plan can be repeated.
This shows that our plan can be repeated.
This shows the importance of goal, math, execution, and courage. Keep your focus on the numbers. Don’t let negative emotion or the naysayers stop you.
And regarding longer term, say, in the next 15 years, just assume a conservative 10% per year:
$5.5 million x 1.1**15 = $23 million.
Again, compounding over time is the eighth wonder of the world. It can do wonders for us. It can do wonders for you. Thank you for reading. Good luck in your investing.
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