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How good is this investment?
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THE SCENARIO
I recently ran across a potential opportunity that seems like it might be a good investment with a solid return.
The way it's structured is this: I invest $50,000 for the down payment on a vacation rental property and I get monthly cash flow until I've doubled my money, at which point my participation ends and the operating partner owns the property in whole. The operator's current properties are making enough money that he estimates that it would take four years to get me to the double-my-money point.
The question: If I made the same amount of money each month for four years until I'd received double my initial $50,000 investment, what would my return on investment (ROI) be?
THE SOLUTION
This one's pretty straightforward, but to solve it, we need to know how much I'd expect to receive each month. If I invest $50,000 and it takes me 4 years (48 months) to receive double my investment (i.e. $100,000), then I receive $100,000 ÷ 48 = $2,083.33 per month.
First things first, make sure the calculator is using 12 Payments per Year.
N: 48 (I receive income for 4 years, then the investment ends)
I/YR: (This is what I'm trying to find)
PV: -50,000 (I invest $50,000 into the deal)
PMT: 2,083.33 (I get $2,083.33 per month in income)
FV: 0 (When the deal ends, I've been fully paid and don't receive anything more)
If I do this deal, I can expect to make 39.39% on my $50,000 investment.
In a general sense, if I can make 39% on my money, safely, legally, and ethically, I try to do it. It wouldn't take too many years of that kind of returns to really explode my net worth, and that's something I'm interested in doing. Naturally, I need to manage my risk in the deal to make sure that my money doesn't just evaporate, and that's why due diligence on the investment (and its operator) is important.
What do you think? Would this sort of an investment appeal to you, or do you consider anything with this level of returns to be inherently too risky for you to consider? If you consider it too risky, what level of return is your 'ceiling'? More importantly, what made you choose that number? Let us know in the comments!
