I got a message from a physician client of mine who wanted me to evaluate a real estate deal that was supposed to give him a 32x Return in 10 years, tax free. Note that the promised return is not 32%, but 32x, meaning that if one were to put in $400k today, he would get back $12.8mm in ten years. The proprietors of the deal explained it in a 90-minute long video message that was uploaded to a popular video platform. The proprietors further shared that there were only very limited spots left for investors to take advantage of this awesome opportunity.

Let’s ignore the “tax free” claim for now, since that usually has to do with investments in qualified opportunity zones, about which I have previously written an article. For now, I am primarily interested in thinking through the economic possibility of achieving the 32x return. The video explains that they double their money every two years by investing in multifamily units. (Buy and renovate for $400k, then sell for $800k.) By compounding their income over five two-year periods, or ten years, they achieve a 32x return. It’s simple as that. The proprietors have done it themselves, and the wife of one of them is a mathematician – she has confirmed the compounding formula: 2^5 = 32.

Now I am not a real estate expert, but this level of returns does not make economic sense to me. Here is how I explained my misgivings to my client.

“… 100% over two years is an outrageously good return. The only way that is possible is that they have a monopoly on a special right (or license) that excludes everybody else or they have a monopoly on extremely valuable knowledge. Or what Warren Buffet likes to call “Moat”.

Take yourself for example, you have a doctor’s license and you have very specialized medical knowledge, which are both extremely hard to acquire. That’s why you can make that money you make. If everyone could become a doctor by Googling and they didn’t need a license to practice, then your income would drop to the average living wage in America. 

They claim to use multifamily units and the exponential formula to generate the 32x return. Note that people don’t need a license to flip multifamily units and the exponential formula is public knowledge. They don’t have a monopoly on either. The competition will drive away any excessive returns. That is just pure economics. 

Now let me argue from a different angle. Putting aside the economics, let’s assume the money market opportunity does exist. Why would they want to hold a seminar to tell other people about it? Wouldn’t it make more sense for them to keep this great opportunity for themselves?”

What do you think of my explanation? Do you think it could potentially be a real opportunity? I’d love to hear from you, especially those of you in the real estate business. 

Get informed about wealth building, sign up for The Investment Scientist newsletter