b. Roger has determined that he would like to retire on the equivalent of $100,000 today. This dollar amount becomes the initial base for the calculation.

c. What will the inflation rate average over this period of time, 2%, 3%, 5%? This cost-of-living increase becomes the rate. Roger chose 3%.

Or, for easy figuring, $160,000.

2. Roger feels that upon retirement he can expect to obtain an annuity bearing an interest of 6%. Therefore, he calculates ($160,000 / 6% = $2,666,667) that in 15 years he will need about $2,700,000 to secure his retirement. This sum becomes the future value in the final calculation.

3. Roger's savings of $200,000 can be used as the initial investment. His contribution of $10,000, that will increase annually compounding at 10%, can be added yearly during the investment period.

(These are all negative entries as they are being subtracted from his pocket to be invested. They are cash outflows. The resultant $2,700,000 is positive because it will be a cash inflow.)

When we solve this equation, we learn that the annual compounded rate we need to achieve to reach $2,700,000 with a $200,000 initial investment and the above annual cash investments over 15 years is 14.75%. Upon attaining the $2,700,000, Davis can

then invest it in a secure, no-hassle investment that has a 6% annual yield and be sure that he will receive his desired $160,000 yearly income that roughly equates to $100,000 income today.

The needed return of 14.75% is the Davis Rate. Every time Roger analyzes an investment, he can make a determination if the investment might work for him simply by checking the investment's IRR. If, based upon Roger's financial analysis of the investment and not the seller's, the property's return is anticipated to be less than the Davis Rate, Roger must keep shopping.

The Davis Rate, Your Rate, can be instrumental in making suitable acquisitions. Used in conjunction with a Sensitivity Analysis, you can determine the exact price that is the top price you should pay for the investment you are considering. It is, of course, the purchase price that results in an IRR equal to Your Rate, which in Roger's case, is 14.75%.

This is because a Sensitivity Analysis, based upon the assumptions you and your investment broker, such as myself, have created reveal the returns that result from acquisitions at various prices. This is an excellent tool that should be consulted for every acquisition.

The moral of the Your Rate story is to calculate Your Rate now again every year until you reach your financial goal. Certainly, every time an acquisition is considered, or even when assessing your investment options, you should calculate your Your Rate. It's an invaluable tool that will guide you to investment success.

(This article was written by Mike Hesse. You may find more of his articles, his current listings and other real estate investment information at www.MikeHesse.com.)

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MIKE HESSE, CCIM, CPM
Real Estate & Investment Specialist
DIRECT - 720.581.2222
online at www.MikeHesse.com
email Mike@MikeHesse.com