How many of you have asked yourself, “Is this a good return on investments?” In this episode, Matt gives the ultimate answer to this question! Find out why it’s important to set your goals first, the differences between offensive and defensive strategies, and why you should check how your current money is performing.
What You Will Learn About What Is A Good Return on Investments?
- Why it is important to set your goals first
- Playing an offensive vs. a defensive strategy
- How to play offensively and escape the rat race
- Why you should check how your current money is performing, and
- How to analyze that in order to achieve high-performing assets
- Matt’s practical example of a good return on investments
- At which moment you should switch from offensive to defensive play and protect what you have built
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Speaker 1: This is Theriault Media.
Matt Theriault: Hey, Matt here at Epic Real Estate, and today, we’re going to talk about how to answer the question, what makes a good return on investments, and we’re going to do that today on Financial Freedom Friday.
All right, so I just got this question. It comes in probably two, three times a week either from my students at the Epic Pro Academy or in my REI Ace Program or just listeners from the podcast. They’ll send me their deals, and they’ll say, “Is this a good one? Is this a good return, and how do I know what a good return is?” Let’s talk about what makes a good return on investments. From this point forward, I can just share people this video and not have to answer how I’m going to answer this for you right now.
A good ROI. I’m doing this in the middle of the day. Everyone’s working in the office, so you might hear some background noise. Disregard it. But what makes a good ROI? Well, the answer is, it depends. It depends on a lot of stuff because if I had … Let’s put it this way, 10 emails that I’ve gotten this month on this question, I haven’t answered all 10 of them the exact same way. Let me share with you how I would share this to everybody universally, and now you can answer this question for yourself.
First one is, what is your investment goal? It depends on your goal. Everyone has a different goal when they look at an investment. One, it might be tax breaks. It might be long-term equity build. It might be the overall strategy is just to save, save, save as much cash as you can so it gets to this giant mountain of cash. You got this stockpile of money to where you create this legacy for yourself so you can retire in the Bahamas somewhere down the road. That’s a lot of people’s goal, something to that effect.
Other people have this goal, they just want to get out of the rat race. If you’re watching me right now and you’ve been around here for any length of time, that’s the common goal here. We focus on creating enough residual income first. We shift our focus from making piles of cash to creating streams of cash so we can create enough cash to support the lifestyle that we want. Then you get to live a life of an option. You can live now rather than later, and then you can use this excess, as you continue to build your streams of cash, you can use that excess to build your piles.
Let’s just make that assumption. Let’s escape the rat race. That’s our goal. Our goal is residual income. It’s cash flow. It’s passive income. Whatever you want to call it, we want that monthly recurring income to come in each and every month with or without your direct participation so there’s enough there to cover your monthly expenses. Deal? All right. That’s the goal. If your goal is different than that, then your answer’s probably going to be different, but I’m just going to make that assumption.
Second is, what is your current money, how is your current money performing? What’s the current return on, or return on investment of your current investments? You’ve got some stuff out there, or whether you’re just getting started or you’ve been doing this for five years or 10 years, your portfolio’s probably going to look very different depending on where you are. We’re going to look at that.
The third place we’re going to look at, or the third variable, is what is your strategy, and the strategy mostly being, what I’m talking about there is are you playing to win or are you playing not to lose? Are you playing offense or are you playing defense? Neither one is wrong there either. It just depends on what you want with regard to your goal and how quickly you want to get to your goal.
Let’s say we’re going to play to win. Let’s play to win, and particularly, if you’re playing to win when it comes to escaping the rat race, you have a lot of … There’s a lot of room for error in here. There’s a lot of places where you can mess up and not lose that much time. Let’s just go all for it and get ourselves out of the rat race, and then we can worry about building the legacy later on and preserving and protecting our wealth, but let’s get us out of this rat race first. We’re going to play offense.
What we need to do here is, first thing is we’re going to, now that we know our goal’s to get out of the rat race, we want to look at our current investments and how they are performing.
Let’s say we’ve got some money in the stock market. We got some money in the stock market. Let’s say we’ve got some money in a 401(k). Let’s say we’ve got some money in a CD, a certificate of deposit. Some people call those a certificate of disappointment. Savings. Got some cash in a savings account. Let’s say you own your house, and you’ve got some equity in there. How much do we have in there?
Let’s look at this. Let’s say in the stock market, let’s pretend, or maybe you do, you got 100,000 there, and your 401(k), you’ve been at your job for a little while, you’ve got $200,000 in your 401(k). Maybe you’ve got $75,000 in your CD. You got $50,000 in cash, and let’s say you got $150,000 of equity in your house. These are our investments. That’s how much we have in each one of those vehicles. Now the next thing we need to know is how are they performing? What is the current return on investment of what we already have?
I’m kind of taking you through a strip-down exercise that we do inside of The Epic Intensive to help people escape the rat race. I’m just going to, for the sake of efficiency, I’m just going to put these in order. Normally, we’d lay all these out, we’d factor in all of the return on investments, all the ROI, and then we’ll go ahead and report them so we have the best-performing on top, the lowest-performing on the bottom. I’m just going to automatically do them that way.
Say the stock market, we’re getting 10% on there. Say our 401(k), we’re getting 8%. Our CD, we’re getting 2% return. Our savings account, say we’re getting 1%, and equity on our house, if our goal is to escape the rat race to create residual income, the equity is producing zero for us.
Now, now we know what we’re working with. We know what our goal is to escape the rat race. We know our current return on investment of what we already have. We know our strategy’s offense. This is what that looks like. I’m going to look at my lowest-performing assets, my lowest-performing investments, and how do I reallocate the funds down here and put them up on top. That’s the offensive game we’re going to play. That’s how we’re going to play to win.
I’d look at, I got $150,000 down here doing absolutely nothing for me. It’s just parked there. It’s resting. Well, I get up and go to work every day. That’s not fair. We want that money to work for us, at least as hard as we did for it. Our cash, we got 50,000 running 1%. I don’t know. Maybe we want to keep that in there. May helps us sleep well. We call it our “sleep well at night” account. It’s there for a rainy day for emergencies. We’re liquid there. Maybe we won’t touch that.
But then we got this certificate of deposit. We got 75,000 bucks there, 2%. That’s hardly even moving the needle. It’s not even keeping up with inflation. These are two areas that I’m going to look at how do I reallocate these so I can do better than 10? 10% is my best-performing asset. I want to make sure that every investment I look at, what makes a good investment to me is if it improves my situation if it accelerates my progress. I want to take these low-performing assets and make them high-performing assets.
If they … Let’s say I’m looking at an income property, and that income property pays a 12% cash on cash return, and I’m interested in the cash on cash return because that has to do with my goal. I want to create the cash flow. 12% and I look at what I have over here. Would 12% improve my situation? Absolutely. We could put that right here, so we’ve got this income property. Let’s say it took us $75,000. Oh, excuse me. $75,000 is what it took for a down payment. Once we own that property, they’re going to pay us a 12% return.
I have two places I can pull that money from. I can go out and do a refi on the house. I can get a home equity line of credit. I can pull that money out that way, or I can come to this certificate of deposit. We can cross out this 2%. Now it’s performing at 12%. We’ve just improved our portfolio. That was a good investment.
The answer to the question, what is a good return on investments, it’s really any investment that’s performing better than the top echelon of your existing portfolio.
Hopefully, that’s enough information for you from now on to make an educated decision about whatever opportunity comes across your desk and you deciding “should I or shouldn’t I.” Think about what your goal is, where you’re trying to go, what are your current investments doing, and is this one better than what you currently have, and then your strategy is how can we take something from our low and end put back up here on top or reallocate that so it’s up on the top.
If you’re just getting started, maybe you got nothing, or maybe you got some money in savings account that’s getting 1%. Just about anything you would purchase would improve your situation. But say you’ve been doing this for a while. This is your five-year snapshot, and so this 12% property, that’s a good one for you, or maybe you’ve been doing this for 10 years, or you’ve been at this a while, and maybe 12% is actually your bottom number, and then you come across a property that’s going to pay you 20%, or an investment opportunity that pays you 20%. It might make sense to maybe go ahead and refinance this or sell this completely and take this 12% and turn it into a 20%.
You’re just going to keep on playing this game of leapfrog until you hit your goal. Once you’ve got your residual income or it’s exceeded your expenses, now you’ve reached a goal. You then play the massive amount of offense to get there as quickly as possible. Now that you’re there, now you can start looking at the other side of the strategy, the defense. Now that you got to where you want to be, you’re comfortable, you’re paying for your lifestyle, let’s start protecting what we have, and now we’ll play a little bit more defense so we can try some different strategies then, and then what makes a good return on investment might be entirely different at that point. Alrighty?
Hopefully, that gives you some insight on how to know whether you’re looking at a good deal or not, if that’s a good ROI on the investment that you’re looking at right now. Alrighty? That’s it for today. I’ll see you next week on another episode of Financial Freedom Friday. Take care.