How To Get Infinite Return When Investing In Real Estate
I will be honest; When I first discovered the concept of "infinite returns", it was difficult for me to get involved. I am very familiar with terms like "return on investment" or "annualized return" and use these concepts a lot to determine whether or not an investment is worthwhile.
But an infinite return? It sounded fascinating. . . but it also sounded like another marketing buzzword. However, I decided to delve deeper into this concept and I found it.
What is an Infinite Return?
The definition is quite simple. “Infinite returns” are achieved when you run out of money in a store but still get the benefits of cash flow and other returns (for example, when a property is sold).
Suppose you invest $ 100,000 in a passive real estate business in return for a 10% stake. Over the next few years, your initial capital will be returned to you – your full $ 100,000 – and you can keep the 10% stake.
Registration is still open for a few days.
Then you will continue to receive distributions and cash flow based on your stake (10%). If the property is sold, you will receive a profit based on your percentage in the future.
By the time you get your full initial $ 100,000 investment back, you have no investment in the business. This money can be spent elsewhere or invested. You can't lose money technically either – everything from that point on is real winnings. It's like the term "playing with house money".
So if the return on investment (ROI) is calculated as follows:
If you've received $ 10,000 in dividends this year but run out of money in the business, you can see where that idea of "infinite" returns came from. You receive investment income without a fixed amount of money and without any risk.
I've found that there are two common ways to get infinite returns, especially on real estate. You are:
- No money down purchases
- Pay out refinancing transactions
Let's take a closer look at these.
No money down purchases
A no money down purchase is exactly what it sounds like – you are buying a property with no down payment. Although traditional methods would require you to make a substantial down payment, I know many doctors who have been able to use this method to purchase real estate with great success.
It would be difficult for you today to find a conventional bank that is ready to fund 100% of a purchase so you don't have to pay a deposit. However, if you get creative enough, there are other ways to do it.
For example, I know that investors who had the seller of the property agreed to "pay" the loan for the entire purchase amount. In other words, instead of a bank lending you the money for the investment, the seller commits to sell the property to you. You then pay the seller monthly as if you were receiving a loan from them.
Security is the property itself and conditions are created like a normal bank: the amount of the loan, the interest rate and the term.
If it is a rental property, the investor can get cash flow from the property even if the seller bears the debt. This can lead to an infinite return scenario where no money went into the business initially, but you can benefit from the property's cash flow.
Alternatively, I've seen doctors buy their primary homes with a 0% doctor loan. You then sell the house after it has increased in value and make a profit. All of this without making an initial deposit.
Of course, they usually use the profit to pay a deposit for another house, but that profit was made with a no-money purchase.
Both situations are considered purchases without loss of money and can lead to a scenario with infinite returns.
Pay off refinancing operations
The other situation is a little more interesting for me and more of a strategy that I would like to use when looking for investment properties or passive real estate opportunities.
Here is the process in brief:
- Someone is buying a rental property
- Increases its value by increasing the operating result (rehab & renovation, increasing rents)
- The property is then refinanced at the bank, with the initial down payment and the initial rehabilitation costs being deducted at the same time.
- At this point, they own the property but have made their initial investment so they have essentially no initial capital of their own in the business
Let's delve a little deeper into this.
How is a property valued?
How is a property valued? Well, a multi-family property is rated by this simple equation:
Operating profit (NOI) is income minus expenses, essentially profit.
Cap rate is a value used to estimate the profitability of a property and is particularly useful for comparing property. Another possibility is that the cap rate is the expected cash-on-cash return on a property (without mortgages or debt payments).
So if you look at the above equation to add value to property, savvy investors are looking to increase operating income. This is done by taking measures to increase revenue, reduce expenditure, or both wherever possible.
Taking these measures is known as "enforced appreciation" or "enforced value creation". It's like taking over a company and improving the way it works, which then increases its value.
Bank refinancing and disbursements
Banks are ready to lend based on a “lending percentage”. For example, if they are willing to lend up to 75% of the value of the property, the amount they are willing to lend increases accordingly as you increase the value of the property.
If you are able to increase the value of the property and refinance yourself in a larger loan, you may be able to get money back.
Here is a simplified example:
Let's say you use $ 250,000 to buy a $ 1,000,000 building. This is achieved through a $ 750,000 loan from the bank. This is a 75% loan: a $ 750,000 loan for a $ 1 million building. (750,000 / 1,000,000)
They renovate the property (spend $ 125,000), improve operations, increase rent, keep costs down and increase the value of the property. In four years, the value of the property has increased from $ 1 million to $ 1.5 million.
You will then find a bank ready to refinance you into a 75% loan valued at $ 1,500,000. That means the bank would be ready to give you a $ 1,125,000 ($ 1,500,000 x $ 0.75) loan.
You take that $ 1,125,000 and pay off the previous $ 750,000 loan, leaving you with $ 375,000 left.
Well, what do you know, your initial investment was a down payment of $ 250,000 and a renovation cost of $ 125,000 for a total of $ 375,000. You pay back the entire $ 375,000 and voila, you now own a $ 1.5 million property that you have no capital of your own.
Oh, and you still get the monthly cash flow. This entire process is tax free until you sell.
This is known as withdrawal refinancing. At this point, you have essentially reached the status of an infinite return. In the future, you will no longer have personal money in the business, but you will have ownership, cash flow, and equity when you sell.
Can you get infinite returns on passive real estate investments?
Absolutely. When I invest in passive real estate syndications, this is one of the strategies I am looking for.
Instead of doing all of the work of finding the property, renovating it, increasing rents, managing expenses, refinancing, etc., now employ a team of professionals to make it happen.
After all, the main goal of all my investments is cash flow and I try to find the right balance to use my time and effort to get the maximum result. What better way to get cash flow than in a business where you no longer have your own funds tied up?
Infinite return on my first syndication investment
I didn't really know what I was doing with my first syndication deal. Fortunately, it became an infinite return situation as you will see below. I will write a detailed post about this in the future, but here's a short one:
On September 12, 2014, I invested $ 25,000 in a syndication agreement for a 1.04% interest in a property valued at $ 6.75 million.
On November 30, 2015, I received $ 13,188.36 in distribution. The sponsors had quickly improved their processes and were able to refinance the property and return part of my capital. That's 53% of my original capital invested, which was returned to me after 14 months, leaving me with 47% of my capital in business.
I continued to receive payouts averaging $ 300-350 each quarter. I occasionally received larger distributions (around $ 4,000 to $ 5,000) because they could give me more capital back.
On March 31, 2018, I received a distribution that exceeded my total accumulated distributions to my initial investment of $ 25,000.
At that point it meant that I hadn't invested any more capital in the deal and everything was pure sauce from that point on. That happened in 3.5 years.
Since then, I've received an average of $ 459 a quarter every quarter, which ultimately equates to $ 1,836 a year. If I were to calculate a return normally it would be $ 1836 to $ 25,000, which is 7%. Not bad, right?
But let's keep in mind, I currently have no investment in the deal. Yes, it's 7% when I think about my initial investment, but technically it is an infinite return on cash flow since I have no money in the business.
Additionally, I still have a 1.04% interest in a building that was just valued at $ 13.49 million. If that sold, I would get a nice profit. However, I am satisfied with the infinite cash flow that I am currently receiving.
Oh, and here's the kicker: it was all tax free. Due to depreciation, I posted negative net rental income every year. If anything, all other passive income gains that I have received are offset.
Should you be looking for infinite returns?
There are many ways to get a high return on investments, especially in real estate. As it turns out, “infinite returns” is much more than a catchphrase. It is a powerful way to maximize return while reducing risk. This is basically the holy grail of investing.
It's also just a strategy when investing in real estate, but it's definitely one of the tools I want to use with new investments.
Do you like this concept? Did you apply this strategy to your investment?
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