Your average stock market investor will typically see somewhere around 10 percent return on investment over their lives. But how could we get a 20 percent ROI with our investments?
Is it even possible? Absolutely.
In fact I’ve gotten 30% ROI or better in the first three years of every real estate investment I’ve made (4 so far). And I’m expecting those investments to have long term ROI of between 20-30%.
You can achieve 20 percent ROI by using debt to amplify the success of your investments, by investing in extremely high cash flowing assets like online business, or by becoming an expert stock investor.
Get 20% ROI Using Debt
One of the simplest ways to supercharge your return on investment is to use debt to your advantage.
Here’s the power of debt. Let’s say someone gives you $10,000 and charges you 5% interest on that money. Then you take the money and invest it in the stock market. The stock market grows, on average, somewhere between 8-12% each year (let’s call it 10%).
After 5 years, your debt would be at $12,763 and the value of your stocks would be $16,105. You would have made over $3,000 with that debt.
After 10 years, the debt would be $16,289 and your stocks’ value would be $25,937. That’s almost $10,000 more!
Since the value of the stocks you own grow faster than the balance of your debt, you’ll be getting richer with someone else’s money.
Achieving 20% ROI in the stock market with debt
Let’s assume you could get a loan for any amount with 5% interest. Our return on investment is always dependent on how much money we put into the investment. So in the previous example where we got a $10,000 loan and put it all into the stock market, we didn’t put any money in. That gives us an infinite ROI (anything divided by 0 is infinite).
If we don’t get a loan and just put our own money into the stock market, then we would get a 10% ROI.
So somewhere in between 100% loan money and 0% loan money we would see a 20% return on investment.
That spot is right around 20% down on the loan. Let’s see how that works.
You put $2,000 down for an $8,000 loan (5% interest). Then you buy $10,000 worth of stocks.
After 10 years your stock portfolio would be worth $25,937. Once you pay off your debt, you’ll be left with $12,906, which is about a 20.5% return on your $2,000 investment.
$2,000 x 1.2010 = $12,383
So let’s recap.
If you could get a loan at 5% interest for 20% down and you put that all in the stock market (with 10% returns), you’d get about a 20% return on your 20% down.
Using debt in the real world
You can’t exactly go around getting a bunch of loans to invest in the stock market. And honestly, I wouldn’t advise it even if you could. You generally have to make monthly payments on loans and stocks likely won’t pay out enough in dividends to cover those loan payments.
So how do you use debt in the real world?
You use it to buy cash flowing investments like business and real estate. Cash flowing investments allow you to pay your monthly loan payments with the cash generated by your investment, and still continue to take full advantage of your asset increasing in value (through appreciation).
Get 20% ROI Without Assuming Debt
I know for a lot of investors, debt is a tool they avoid. If you invest in stocks, you won’t be able to get loans to invest, and even if you could, you’d start running into serious cash flow problems.
So how can you get 20% on your investments without assuming debt?
There are probably a handful of ways to do this, but the truth is it’s not easy. Here are the two ways I know:
- Be very good at stock investing
- Invest in real estate or business and reinvest your cash flow
I’m not a stock investor, so I have no idea how a person could get 20% over long periods of time in the stock market, but I read The Big Short, so I know huge returns are possible for investors with specialized knowledge.
I am, however, a real estate investor (although I use debt to increase my returns). I know that even without assuming debt, 20% ROI is possible. Let me show you two examples.
20% ROI with real estate
When you buy real estate, you get an asset that appreciates in value, usually somewhere between 3-4% each year.
And with no loan, it’s possible to get 15-17% cash on cash return with an investment property (although you’re more likely to get 10-12%).
Those two together can get you up to a 20% ROI. Here’s a real life example:
Our best Airbnb if we didn’t have a loan
Our best performing Airbnb property got us about 60% cash on cash return, and our expected long term return on investment for the property is about 30-32%. But what if we didn’t have a loan?
We bought the house for $100,000 and our mortgage is about $450. Since our current cash flow is around $900 per month, without a mortgage our cash flow would be about $1,350 per month.
If we’d put $100,000 into buying the house, we would have a yearly cash flow of $16,200, or about a 16% cash on cash return.
Add in our 3-4% appreciation and we’re looking at a 20% ROI.
But keep in mind, that’s our best performing property. It’s very difficult to achieve 20% ROI without leveraging the power of debt.
Note: as we’ll see in the next example, cash on cash return is not the same as long term ROI, and you would need to reinvest your earnings to keep your ROI close to 20%.
20% ROI with online business
My next investment will be an online business. The reason I’m wanting to purchase an online business is because I’m a cash flow investor and I can get 40% cash on cash return with the purchase of an online business, even without using debt.
But cash on cash return does not equate to a long term ROI. It’s not compounded interest.
So I buy a business for $100,000, and over the next 12 months I earn $40,000 from the business, which is 40% ROI for the first year. In order to get 40% ROI my second year I would have to make $56,000 from the business. But chances are I will still make around $40,000.
So after two years my actual ROI would be about 34%. And over time that ROI will get lower and lower, and fall below 20%.
Unless, I reinvest the profits.
After two years I’d have made $80,000 from the business, and $120,000 after three years. I can buy another business and get that 40% cash on cash return.
By doing this I can keep the long term return on investment above 20%, even if I don’t reinvest 100% of the profits.
20% ROI is not easily attainable over long periods of time. I’m sure it’s possible in the stock market, but you’d have to be a true expert in the field.
However, you can achieve 20% ROI in real estate and business without being exceptional. You only need to be competent.
Debt is a tool that can amplify the success or failures of our investments. If we have reliable investing standards and practices, debt can take our investment returns well above 20%.