Monday, May 10, 2021

Difference Between Average Rate Returns & Actual Rate Return in Investments

Do you want to make better financial decisions?

Watch this short video and learn the difference between average rate returns and actual rate returns. Only here at Real Estate Investing with Jay Conner!

Let’s talk about money, investments, and wealth together with Jay Conner and his special guest John Dwyer.

John Dwyer is an eight-time recipient of Ohio National’s Inner Circle (top 1% of U.S. financial representatives).

A five-time qualifier, and a four-time recipient of the Executive Counsel of Honor, and was elected by his peers to serve as a current member of the Ohio National Field Advisory Board.

John also qualified for the 2017 GAMA Silver International Management Award.

Currently serves on the Field Advisory Board of Ohio National.

Was elected “40 Under 40” Prairie Business Magazine in 2015, and is a Master Mentor of both Circle of Wealth and The Breakaway League.

As the President and CEO of Solid Rock Financial Group, John leads the organization with incredible passion and vision.

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Jay Conner:

How can we use that information to our benefit when we're looking to invest?


John Dwyer:

And I think that's a great question, right? Because what we have to do is we have to remove the belief system. I call our BS. That averages really matter. And we need to start looking at what we contribute to the asset and what we're actually getting in return of net of fees, net of tax, net of all these different things to find out, even from a cashflow perspective, right? In real estate, we have the expenses, we have, you know, all these different things. And we have to look at what our cap rates are and all these different things of what the actual return on the investment is versus just, you know, what the modeling portfolio might look like from an average perspective. Go ahead. So it's just, you know, even in the real estate space, and I'm sure you've seen this Jay, right. Where people often think about what their returns are, but when they start to extrapolate all the expenses, the fees, and yes, the depreciation, sometimes they're like, man, this thing isn't as good as I thought it was.


Jay Conner:

Exactly. So what I just heard you say, or how to apply, what you just taught us is when you're looking at a potential investment, say in a mutual fund, in a stock or any other type of investment opportunity, the person looking to sell you that investment opportunity is telling you the average rate of return. What I would implement based on what you just say is, okay, that's the average rate of return? What is the actual rate of return? And if they can't tell you, you probably don't want to do business with them. Right?


John Dwyer:

That's right. And a lot of these deals with syndications and different things that we hear about they'll share what the rate of return is. But if you put a future value calculator to it, you find out what the real numbers are and it's off. And not that it's a bad opportunity, but it's not what they're promoting as far as average. Right? And so it's even comes into play for, when we look at, for me, I don't care what the rate of return on your money is. I care what you can spend. So let me quantify that for a little bit, right? So let's just say that Jay, you're working with somebody, you go to advisor A and they're saying, okay, Jay out retirement, you're going to have $5 million in asset value. Okay. You go to advisor B, they tell you they're going to have $3 million of asset value at retirement. Well, which one are you led to believe you're going to hire?


Jay Conner:

The one, the larger amount.


John Dwyer:

Yeah. The $5 million. Right? But what if that $5 million is going to generate $200,000 to you in retirement, but it's all taxable, versus the 3 million is going to generate a $180,000 tax exempt. Now, which number do you want?


Jay Conner

The 3 million.


John Dwyer:

3 million. So what you just told me, Jay is a lower rate of return is better from a cashflow perspective in distribution. See, it's not just so much the asset value. It's what I can spend, but that's not.


Jay Conner:

What all ties in is when you're considering an investment. One of the big questions is what is the tax consequence of that investment?


John Dwyer:

It's huge. And a lot of times that what we're taught to do is we're taught to put money into an account to lower our tax liability today. But all that's done is postpone the tax and the tax calculation is some date in the future. And if you believe what I believe that tax rates are only going to get higher, that's probably not a good decision, but see what we're taught is that we hate paying taxes, right? So CPA's and other legal strategies, don't want to do tax reductions to save the taxes today, but it's not a tax savings. All it is, is a postponement because all you're doing is postponing the tax and the tax calculation to some date in the future, which could be more painful later on. And so these things are the things that we just have to look at and help people navigate through as they make financial decisions, no matter what they're doing.

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