Tracking the growth of a large firm....

General Real Estate Investing
1

Let’s take an example of a large firm that starts with $1,000,000 and let’s just say that it buys a property or properties with a cap rate of 10%. This means that they will make $100,000 in profit the first year. It would take 10 years to save up another $1 million, or let’s say they immediately reinvest that $100,000, which would make them another $10,000 the next year.

Here is a table using a compound interest formula, starting with $1,000,000 at 10% interest, compounded once per year…

Equity Years From Start Cumulative Profit Annual Profit
1,000,000 - - -
1,100,000 1 100,000 100,000
1,210,000 2 210,000 110,000
1,331,000 3 331,000 121,000
1,464,100 4 464,100 133,100
1,610,510 5 610,510 146,410
1,771,561 6 771,561 161,051
1,948,717 7 948,717 177,156
2,143,589 8 1,143,589 194,872
2,357,948 9 1,357,948 214,359
2,593,742 10 1,593,742 235,795
2,853,117 11 1,853,117 259,374
3,138,428 12 2,138,428 285,312
3,452,271 13 2,452,271 313,843
3,797,498 14 2,797,498 345,227
4,177,248 15 3,177,248 379,750
4,594,973 16 3,594,973 417,725
5,054,470 17 4,054,470 459,497
5,559,917 18 4,559,917 505,447
6,115,909 19 5,115,909 555,992
6,727,500 20 5,727,500 611,591
7,400,250 21 6,400,250 672,750
8,140,275 22 7,140,275 740,025

The numbers just don’t add up to where the firms grow to owning billions in assets and making hundreds of millions per year. It would take centuries for the business to finance itself.

They must have additional cash coming in. And not from banks or investors requiring a return because that would just mean more loan payments.

Not all of these large firms raise capital from stock IPO’s. So is there a way to do this without having outside capital come in?

2

I stand corrected… Here’s that same table starting with $400 million…

Equity Years From Start Cumulative Profit Annual Profit
400,000,000 - - -
440,000,000 1 40,000,000 40,000,000
532,400,000 2 132,400,000 92,400,000
708,624,400 3 308,624,400 176,224,400
1,037,496,984 4 637,496,984 328,872,584
1,670,899,268 5 1,270,899,268 633,402,284
2,960,099,978 6 2,560,099,978 1,289,200,710
5,768,397,444 7 5,368,397,444 2,808,297,467
12,365,072,213 8 11,965,072,213 6,596,674,769
29,156,193,474 9 28,756,193,474 16,791,121,261
75,623,656,989 10 75,223,656,989 46,467,463,514
215,763,119,131 11 215,363,119,131 140,139,462,143
677,157,095,731 12 676,757,095,731 461,393,976,600
2,337,729,949,213 13 2,337,329,949,213 1,660,572,853,483
8,877,525,591,763 14 8,877,125,591,763 6,539,795,642,550
37,083,627,527,132 15 37,083,227,527,132 28,206,101,935,369
170,398,266,723,306 16 170,397,866,723,306 133,314,639,196,174
861,272,975,767,253 17 861,272,575,767,253 690,874,709,043,947
4,788,606,529,611,330 18 4,788,606,129,611,330 3,927,333,553,844,080
29,286,681,986,636,800 19 29,286,681,586,636,800 24,498,075,457,025,500
197,026,151,581,014,000 20 197,026,151,181,014,000 167,739,469,594,378,000
1,458,042,767,254,800,000 21 1,458,042,766,854,800,000 1,261,016,615,673,790,000
11,868,868,997,813,700,000 22 11,868,868,997,413,700,000 10,410,826,230,558,900,000

It only takes 7 years to get to $5.7 billion…

It all depends how much you start with… and this doesn’t even include rise in property value or raise in rent…

3

Hi,

Actually a 10 cap rate is the return from the property if the property were bought all cash!

Take into account financing costs of a lender and state and federal taxes on profits.

           GR
4

I know this was all cash.

But this is obviously very theoretical.

Plus, I live in Florida where there is no state income tax, but yes you are right about the federal tax on profits. I didn’t look at that.