A lot of us didn’t learn this math in school because it isn’t taught this way. Instead you attend school from age 5-18 taking a bunch of classes and courses that they tell you are important and you learn later in life that they really weren’t that important.
What I have done here is outlined a simple formula supported with math on how you can take a modest investment of $30,000 dollars and turn it into $500 thousand dollars.
A couple of things to point out here before we get into the math. A lot of these numbers although supported with math and historical metrics that can be backed up. There isn’t a guarantee on any of it. In my opinion and experience the numbers that I will outline here are actually your worst case scenario and you are most likely to do even better than what is outlined below.
In today’s market especially in the mid west and much of the Southeast you can purchase a fairly nice home for around $150,000. Now is it always going to be in the best areas? Maybe not, but they are in stable and solid markets. You are not going to be in an area where the police are on patrol at every corner. However, you might not be next to a Starbucks and Whole Foods either. These are solid blue collar markets that are not crime ridden.
To purchase a $150,000 home, you would need to put $30,000 down payment on this deal. That would be 20%. You avoid paying (PMI) property mortgage insurance on the deal.
In todays market with interest rates bouncing all over the place, I assumed a 6.5% interest rate locked in on a thirty year mortgage.
Let’s look at this math.
$150,000 – $30,000 (down payment)
Loan Amount = $120,000
At the same time we look at this home and its worth today, let’s look out into the future and see what it will be worth in year 30 when you have it paid off.
I am using a very conservative, probably too conservative of an appreciation rate of 3%. Especially currently in the market where inflation has been above 5% for the last two years.
To calculate the future value of the house after 30 years, considering an annual appreciation rate of 3%, we can use the compound interest formula:
Future Value = Present Value * (1 + Appreciation Rate)^Number of Years
Future Value = $150,000 * (1 + 0.03)^30
Future Value = $150,000 * (1.03)^30
Future Value ≈ $322,792.66
So let’s pretend you don’t do anything for 30 years except pay this mortgage and let the house go up in value. Your $30,000 investment becomes $322,792.66.
This by itself is pretty solid. Let’s calculate the return on this 30K in each of the 30 years.
To calculate the growth rate per year, we can use the compound annual growth rate (CAGR) formula. The formula for CAGR is:
CAGR = (Ending Value / Beginning Value)^(1 / Number of Years) – 1
In this case: Beginning Value = $30,000 Ending Value = $322,000 Number of Years = 30
Plugging in these values into the formula, we can calculate the growth rate per year:
CAGR = ($322,000 / $30,000)^(1 / 30) – 1 CAGR ≈ 0.0855 or 8.55%
Therefore, the growth rate per year for an initial investment of $30,000 that turns into $322,000 in 30 years is approximately 8.55%.
An 8.55% return on your money each year for 30 years. Wow! This is a solid return. But we aren’t quite to the $500,000 dollars number are we?
Let’s now assume instead of buying this home and living in it. You instead rent it out.
Again, I am being very conservative with the numbers here. And I am not factoring in maintenance, property management, and cap ex items. But those are most likely pretty nominal in the grand scheme of things and I want you to think about the bigger picture here.
There used to be an old rule in real estate investing called the 1% rule. Meaning you want to be able to rent out a home/apartment/condo for at least 1% of the value of the property.
In this case with the $150,000 house, you would hope to be able to rent it out for $1,500 a month. Nowadays this is very hard. There are these kinds of deals out there, but you just have to really search to find them.
Instead of using the 1% rule, I am actually going to use a smaller number of .75% of value. In the case of this home. .75% of $150,000 = $1,125 a month.
You buy the house at $150,000 and you rent it out for $1,125 a month, the first year.
Now we are going to assume a 3% increase in rents each year on this house. My experience has been this is pretty easy to to do.
Here is the breakdown of the annual rental income for each year over the 30-year period, assuming an initial rental income of $1,125 per month in the first year and a 3% annual rental increase:
Year 1: $13,500.00
Year 2: $13,905.00
Year 3: $14,323.15
Year 4: $14,754.94
Year 5: $15,200.44
Year 6: $15,659.84
Year 7: $16,133.31
Year 8: $16,621.04
Year 9: $17,123.23
Year 10: $17,640.09
Year 11: $18,171.84
Year 12: $18,718.71
Year 13: $19,280.94
Year 14: $19,858.77
Year 15: $20,452.44
Year 16: $21,062.21
Year 17: $21,688.32
Year 18: $22,331.03
Year 19: $22,990.62
Year 20: $23,667.34
Year 21: $24,361.48
Year 22: $25,073.32
Year 23: $25,803.17
Year 24: $26,551.33
Year 25: $27,318.10
Year 26: $28,103.80
Year 27: $28,908.76
Year 28: $29,733.30
Year 29: $30,577.77
Year 30: $31,442.52
Total Money Generated: $638,677.75
These figures represent the annual rental income for each year, with a 3% increase over the previous year.
So we now know two things here.
First: If we buy the house and just live in it. We know that it will be worth $322,792.66 in 30 years.
Second: If we buy this house and rent it out. We know the house is worth $322,792.66 at the end of thirty years. Plus it could potentially generate $638,677.75 in rental income during this 30 year period.
Whether we rent it or we just live in it. We know that both scenarios we have taken $30 thousand dollars and turned it into $322,792.66.
But now let’s calculate what it cost us.
In todays market you can currently get a fixed rate mortgage for thirty years at 6.5%. So let’s look back at our original purchase.
Loan Amount = $150,000 – $30,000 (down payment)
Loan Amount = $120,000
Monthly Interest Rate = Annual Interest Rate / 12 Monthly Interest Rate = 6.5% / 12 = 0.54167% (approx.)
Number of Months = Loan Term * 12 Number of Months = 30 * 12 = 360
Using these values, we can calculate the monthly payment:
Monthly Payment = ($120,000 * 0.0054167) / (1 – (1 + 0.0054167)^(-360)) Monthly Payment ≈ $757.24
Therefore, with a mortgage interest rate of 6.5%, your monthly payment on this house would be approximately $757.24.
We know that we can’t just look at the monthly mortgage payment by itself. Most loans would include you insurance and property taxes each year in the payment.
To keep it simple here. We will assume property taxes will be 1% of value. It varies by state. But 1% is a solid estimate. On a $150,000 house thus would be $1,500 a year. $125 a month.
Insurance again is little tricky depending on where you purchase the home. But a solid estimate is to assume $150 a month insurance.
So now we will add the $150 insurance and $125 a month for pretty taxes to the monthly payment of the home.
$150 + $125 + $757.24 = $1,032.24
Now lets multiply this by 12.
12 X $1,032.24 = $12,386.88 a year it costs you.
| Total Rent | Expenses | Cash Flow | |
| Year 1: | $13,500.00 | $12,386.88 | $1,113.12 |
| Year 2: | $13,905.00 | $12,386.88 | $1,518.12 |
| Year 3: | $14,323.15 | $12,386.88 | $1,936.27 |
| Year 4: | $14,754.94 | $12,386.88 | $2,368.06 |
| Year 5: | $15,200.44 | $12,386.88 | $2,813.56 |
| Year 6: | $15,659.84 | $12,386.88 | $3,272.79 |
| Year 7: | $16,133.31 | $12,386.88 | $3,745.85 |
| Year 8: | $16,621.04 | $12,386.88 | $4,232.82 |
| Year 9: | $17,123.23 | $12,386.88 | $4,733.80 |
| Year 10: | $17,640.09 | $12,386.88 | $5,248.87 |
| Year 11: | $18,171.84 | $12,386.88 | $5,778.15 |
| Year 12: | $18,718.71 | $12,386.88 | $6,321.73 |
| Year 13: | $19,280.94 | $12,386.88 | $6,879.72 |
| Year 14: | $19,858.77 | $12,386.88 | $7,452.22 |
| Year 15: | $20,452.44 | $12,386.88 | $8,039.33 |
| Year 16: | $21,062.21 | $12,386.88 | $8,641.16 |
| Year 17: | $21,688.32 | $12,386.88 | $9,257.81 |
| Year 18: | $22,331.03 | $12,386.88 | $9,889.39 |
| Year 19: | $22,990.62 | $12,386.88 | $10,535.00 |
| Year 20: | $23,667.34 | $12,386.88 | $11,194.74 |
| Year 21: | $24,361.48 | $12,386.88 | $11,868.72 |
| Year 22: | $25,073.32 | $12,386.88 | $12,557.04 |
| Year 23: | $25,803.17 | $12,386.88 | $13,259.81 |
| Year 24: | $26,551.33 | $12,386.88 | $13,977.14 |
| Year 25: | $27,318.10 | $12,386.88 | $14,709.15 |
| Year 26: | $28,103.80 | $12,386.88 | $15,455.93 |
| Year 27: | $28,908.76 | $12,386.88 | $16,217.59 |
| Year 28: | $29,733.30 | $12,386.88 | $16,994.24 |
| Year 29: | $30,577.77 | $12,386.88 | $17,785.98 |
| Year 30: | $31,442.52 | $12,386.88 | $18,592.92 |
| $638,677.75. | $371,606.40 | $267,071.35 |
If we look at the chart above we can now actually see what it costs us to own this place and live in it for 30 years or if we rent it out for 30 years.
In either scenario we paid $371,606.40 to have a $322,792.66 asset after thirty years. We see that in the expense column.
Now if we look at the rent collected column minus the expenses column we see the cash flow column of $267,071.35 in free cash flow that this property generated.
And if you add the now free and clear home of $322,792.66 + the free cash flow of $267,071.35 that equals $589,864.01.
And you now have turned $30,000 dollars into more than $500,000.
Let’s say you spend 30% of your free cash flow in issues over the 30 years. You still have roughly $500,000 between what the asset is worth and the cash flow it generated.
What if you did this twice? Your total investment would only be $60,000 thousand and at the end of thirty years you would have roughly a million dollars. What about a third time or a fourth?
Look, I know some people may question every number here and try to include other expenses. I included the most important and ongoing expenses.
What I wanted to show you here and is how it is done. This is the secret to wealth creation. Buy great assets and hold them.
You just have to now have the courage to go out and do the deal.
Let me know how I can help you.
To your success and your future.
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