Yes it is possible to consistently get 30% ROI on your investments, but it’s not possible through your typical methods of investing. In the five years since I’ve started investing seriously, I’ve seen that returns of nearly 30% are possible in real estate. And we’ve achieved that mostly through investing in Airbnbs.
I also have investor friends who have seen returns even far greater than 30% through purchasing businesses.
So let’s look at the two repeatable ways I’ve seen investors get 30% ROI or better, and maybe some examples of other huge returns that may not be as repeatable.
Can You Consistently Get 30% in the Stock Market?
For someone to get 30% ROI over a long period of time in the stock market is truly exceptional. Many consider Warren Buffet to be the greatest investor who ever lived, and he was able to achieve a 30% average ROI between 1957 and 1969.
However, Buffet’s lifetime average return on investment is only about 20%. And another famous high performing investor, Michael Burry, has managed about 22% ROI between 2000 and 2008, a time when the majority of investors across the globe were losing money.
So can you get 30% in the stock market? It’s possible, but it’s also uncharted territory. In order to achieve something like that over a long period of time, you’d have to fundamentally change how a person invests in the market. You’d have to do something that’s never been done before (as far as we know).
How to increase your ROI in the stock market
You’ll notice a theme in this article about how to increase your ROI. I will show you that leveraging your money (using loans) to invest can significantly increase your ROI on many investments.
The basic idea is that you put some of your own money into an investment and borrow some money to put into it, and as long as the ROI on the investment is greater than the interest rate on the loan, you’ll get a better return on your investment.
Here’s a quick example.
For simplicity, let’s assume you have $100 and you want to put it into the stock market. Let’s also assume that the stock market returns 10% each year.
If I put $100 in, I’ll have $110 next year and $121 the year after that, 10% ROI.
But what if I put $100 of my own money in and got a $100 loan (at 5% interest) and put that money in the stock market as well?
The loan money also gets 10%. So after a year the $200 is worth $220. My loan balance is now at $105, so my total money is at $115 ($220 – $105).
That’s a 15% ROI!
Since the money was growing at 10% in the stock market and the loan was only growing at 5%, I was making more money. If this example doesn’t click, don’t worry. We’ll be looking at more examples of leverage increasing your return on investment.
Getting 30% ROI in Real Estate
Most people know that real estate is a great investment, but few know exactly WHY real estate is a great investment. There are a few reasons. Real estate investing offers great tax benefits, it’s a physical asset that holds value no matter what the market does, and it present the opportunity for positive cash flow (much like stock dividends, but better).
But perhaps the biggest reason why real estate is such a great investment is that banks LOVE giving loans to buy real estate. It’s relatively easy to leverage your money in real estate.
I wrote an article about how the ROI on my real estate investments so far is somewhere between 25% and 30%.
First, I want to recap how I’m getting those returns, and then I want to talk about how you could do even better.
The Investor’s Handbook: I created software to walk you step by step through your first real estate investment
Getting 25% to 30% ROI in real estate
There are four ways that you gain net worth as a real estate investor.
- Cash flow (from rent collected)
- Pay off your mortgage (gain equity)
- Appreciation of the property
- Tax breaks
Success in real estate investing is very dependent on your ability to sustain positive cash flow. If the rent you collect from your rental is consistently greater than the cost of all your expenses, plus the mortgage payments, then you won’t have trouble getting a respectable ROI.
Positive cash flow makes up a modest percentage of your ROI, and with my investments it amounts to somewhere around 7%.
Paying down your mortgage
Next is the mortgage payment. As you make payments on your mortgage, a portion of that goes towards the principal balance on your loan, which directly increases your net worth. As your loan balance goes down, your net worth goes up.
With the loan terms I have on my investment properties, the ROI from paying the mortgage is about 5%. So already, between cash flow and mortgage payments, I’m getting 12% ROI, which is better than the stock market.
Appreciation using leverage
Next we have the driving force of wealth building in real estate, property appreciation. Real estate in the U.S. increases in value by an average of 3-4% each year. That doesn’t sound like a lot, but when you pair that number with the power of leverage, it’s magic.
If I buy a $100,000 property for full price, then next year that property will be worth $103,000 and I will have made $3,000 (3% return) on that investment.
But if I buy that property for $20,000 and get an $80,000 loan, then next year the property will still be worth $103,000 and I will still have made $3,000. But since I only spent $20,000 to buy the property, that $3,000 is actually a 15% ROI.
When you put 20% down on a property, you can expect your ROI from property appreciation to be about 15%.
Last is the tax breaks. I won’t go into detail, but I’ll just say that because of the tax breaks real estate investing allows (primarily property depreciation and mortgage interest deductions), the cash I make from real estate investing is tax free.
So 7% from cash flow, 5% from paying down the mortgage, and 15% from property appreciation equals 27% ROI from a real estate investment.
Getting better than 30% ROI in real estate
I showed you how I’ve been getting 27% ROI on my real estate investments, but how could you do better and get 30% or better?
The answer of course lies with the most powerful driver of ROI in real estate investing, leverage.
We said that a 20% down payment leads to a 15% ROI from property appreciation, but what if we put only 10% down, or 5% down? Our ROI from property appreciation goes up accordingly.
This table shows how your down payment affects return on investment from property appreciation.
|Down Payment||Property Appreciation||Return on Investment|
So the lower your down payment, the higher your ROI from property appreciation. At 5% down, you’re getting 60% ROI from property appreciation. Insane!
The caveats of low down payments
The benefit of a low down payment is clear, you get huge ROI for your investment, but there are a few caveats that make this hard to execute.
1. Lenders usually want 20% down or more
The first caveat is that it’s very difficult to find a lender willing to let you put 10% or 5% down on an investment property. The low down payments are usually reserved for your primary residence, not a rental property.
I put 10% down on my primary residence, but all my investment properties have been 20% down. Banks are very unlikely to give a new investor loan terms with 5% or 10% down.
So if you want to get a lower down payment, you’ll probably have to live in the property for a while to claim it as a primary residence. You can either rent it while you live in it, or wait to move to another home (for 5% down) and then rent it.
2. Cash flow becomes harder
Naturally, if you have a lower down payment, then your mortgage payment will be bigger. And that of course means that you’ll need to bring in more money from rent collected to break even or have positive cash flow.
It’s not uncommon for a few hundred dollars per month to be the difference between a profitable investment and one that has negative cash flow. Negative cash flow is very bad because you will have to find money outside of the investment to cover the expenses.
If you’re having to pay the expenses of your investment property from your personal wages, then you’re going to have a bad time. And you’ll probably end up wanting to sell the property.
3. Even more difficult the wealthier you become
When you’re first starting out, buying your first property, you’ll probably have under $100,000 to invest. I bought my first investment property with $18,000 of my own money. If I was going 5% down with $18,000 then that would be a $360,000 home. Pretty reasonable to find a property for that price.
But what about when you have $1,000,000 to invest? If you want to put 5% down, you’re either looking at a $20,000,000 property or your looking at 100 properties worth $200,000.
When you have larger amounts of money, these kind of returns become much more difficult to attain.
Getting 30% ROI Buying Businesses
It’s totally possible to get over 30% ROI in real estate, but to do so you’ll likely need to put less than 20% down. But there’s another investment that I’m very excited about right now and it’s business acquisition.
The two reasons I’m so excited about buying a business are that they offer the opportunity for incredible return on investment and most of that return on investment is directly from cash flow.
Businesses, at least most of them, are valued based on their cash flow. When you buy a business you’re mostly just buying a cash generating machine.
And generally, a business is valued at 2.5 to 5 times its yearly income. So you can buy a business that makes $100,000 a year for $250,000 to $500,000. Let’s look at how that can translate into incredibly high ROI.
Buying a business without leverage for 30% cash on cash return
Cash on cash return is a different way of measuring return on investment. It’s a shorter term measurement (1 year) and its primary goal is to measure how much cash flow you create with your investments.
Again, you can buy a business for 3 times its yearly income. So if you buy a business making $100,000 per year outright for $300,000 your cash on cash return is 33%.
You can return 33% of your initial cash investment to yourself in one year.
Reaching a cash on cash return of over 30% is mostly dependent on the purchase price of the business, and your ability to keep it running profitably.
Compound Interest vs. Cash on Cash Return
Normally when we talk about getting a 30% return on our investment, we’re wanting to get compounding interest. We want to get 30% return in our first year, then get 30% again in our second year and so on.
Cash on cash return only measures the first year of returns, so it’s not a measure of compounding interest.
So how can we get 30% return again in our second year after buying a business? By re-investing our cash.
We bought a business making $100,000 per year for $300,000. So in year one we will expect to make $100,000. Our $300,000 will continue to get 30% ROI as long as the business remains profitable, but the $100,000 income we made in our first year won’t make 30%.
We can make 30% on that $100,000 by purchasing another business with it. We reinvest the cash the business brings in and by doing this we can create compounding interest.
Getting insane ROI buying businesses with leverage
It’s harder to get a loan to buy a business than it is to get a loan to buy real estate. But it’s very possible. I have a friend who has already bought two businesses by getting loans from banks. And just like in real estate, your return on investment increases significantly when you borrow money to buy the business.
To show how this works, I’ll go through a quick example.
Let’s buy the same business that’s making $100,000 per year for $300,000. Instead of buying the business outright, let’s put 25% down on the business and get a loan for the rest.
So we put $75,000 down and get a loan for $225,000. A typical loan for a business acquisition might be 10 years at 7% interest. This would result in monthly payments of $2,612 or about $31,500 per year in loan payments.
This should have us making about $68,500 per year from the business ($100,000 – $31,500). Since we only put $75,000 down, we make back almost our entire investment in one year.
This is a 91% cash on cash return!!!
And that’s not some once in a lifetime thing, you can literally make that happen consistently if you learn to effectively operate your business acquisitions.
Using an SBA Loan for xxx% return
The Small Business Administration secures loans to purchase businesses, and they allow borrowers to put 10% down (plus 2-3% in fees).
We could buy our $300,000 business for $30,000 down plus $6,000 in fees, and get a $270,000 loan. Our loan payments would be $3,135 per month or about $38,000 per year.
This gives us a yearly cash flow of $62,000 per year.
With our initial investment of $36,000 ($30,000 down payment + $6,000 fees), the cash on cash return is a truly amazing 172%!!!
Using an SBA loan to purchase a business, it’s quite possible to literally double your money in one year. That 172% return on investment doesn’t even include the equity you gain in the business from paying your loan down.
This is the method I plan to use to quit my job in under 18 months. I can turn a $100,000 investment into a yearly salary of over $150,000. And I will be documenting my process on this blog.
Other Examples Of Extremely High ROI
The two most repeatable ways of creating 30% return on investment are through real estate investing and business acquisition. But there are plenty of other examples of investments that have gone nuclear. Here are three that I’ve come across in my reading and research.
Bitcoin has been pretty big news, so it shouldn’t be a secret that early adopters could had made a huge fortune if they played their cards right. Between 2010 and 2021, Bitcoin saw annual returns of over 350%.
Know how crazy that is?
If you had bought only $1,000 worth of Bitcoin in 2010, your investment would have been worth over $500 million at the end of 2020.
When I wrote my article about return potential of collectibles, one investment shone brightly above the others: beanie babies.
Savvy investors in beanie babies saw 100% returns over 5 years. That means that an effective $1,000 investment would have been worth over $32,000 5 years later. If you could have kept that up for another five years it would have been worth over $1 million.
The Big Short
The last example of insane returns I’ve come across is documented in a book (and later a movie) called The Big Short.
A handful of investors who foresaw the market crash of 2008 decided to be against the market. One of the characters in the book, Michael Burry, managed to see returns of nearly 500% between 2000 and 2008 through his intelligent investing.
I’m sure you’ve heard of investors who managed to create amazing returns on their investments, but most of those stories are impossible to repeat. There are, however, at least two ways that I know to repeatedly create returns of over 30%.
The first is through investing in real estate with very low down payments, usually 10% down or less. And the second is through business acquisition.
I’ve seen 27% ROI on my real estate investments over the last 4 years, and I plan to prove that business acquisition is even more lucrative in the next few years. Best of luck to you and as always…