{"id":157376,"date":"2023-08-28T14:34:34","date_gmt":"2023-08-28T20:34:34","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=157376"},"modified":"2024-02-28T08:33:51","modified_gmt":"2024-02-28T15:33:51","slug":"how-to-generate-infinite-returns-in-real-estate","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/how-to-generate-infinite-returns-in-real-estate","title":{"rendered":"Generating Infinite Returns in Real Estate\u2014Is It Possible?"},"content":{"rendered":"\n

What\u2019s better than a high return on investment? An infinite return on investment. <\/span><\/p>\n\n\n\n

As compelling as the concept is, it has its detractors. Make sure you understand not just how infinite returns work, but also the arguments against pursuing them. <\/span><\/p>\n\n\n\n

What Are Infinite Returns?<\/span><\/h2>\n\n\n\n

If you recall your middle school math, any return on a $0 investment is infinite (e.g., $1 divided by $0). You didn\u2019t invest any money, so even a single dollar represents an infinite return on your nonexistent investment. <\/span><\/p>\n\n\n\n

\u201cWell, that\u2019s all well and good, Brian, but hasn\u2019t anyone ever told you that it takes money to make money? You can\u2019t own something for nothing.\u201d<\/span><\/em><\/p>\n\n\n\n

That\u2019s only partially true in this case. You do need to invest some money initially\u2014but then you can pull it back out later through refinancing. And no, it does <\/span>not <\/span><\/em>take money to make money, as <\/span>delivery drivers earning $170,000<\/span><\/a> a year can tell you. Unimaginative people are quick to tell you what can\u2019t be done. But I digress.<\/span><\/p>\n\n\n\n

How to Invest for Infinite Returns<\/span><\/h2>\n\n\n\n

There are two traditional ways to pursue infinite returns in real estate. You can invest actively in single-family rentals or passively in real estate syndications. <\/span><\/p>\n\n\n\n

The BRRRR method<\/span><\/h3>\n\n\n\n

I started my real estate investing career following the <\/span>BRRRR strategy<\/span><\/a>. <\/span><\/p>\n\n\n\n

You buy a fixer-upper, force equity by renovating it, rent it out, and then you refinance it based on the <\/span>after-repair value<\/span><\/a> (ARV). In the refinancing, you can pull out some or all of the money you invested initially. <\/span><\/p>\n\n\n\n

If you pull out all the cash you invested, congratulations\u2014you now have $0 invested in that property. Every dollar you earn on that property is gravy and represents an infinite return on your (lack of) investment. <\/span><\/p>\n\n\n\n

Syndications with infinite returns<\/span><\/h3>\n\n\n\n

Real estate <\/span>syndications<\/span><\/a> can follow the same strategy, just on a larger scale. The sponsor buys an apartment complex or other commercial property that needs significant renovations, creates equity by improving the property and raising rents, and then refinances. <\/span><\/p>\n\n\n\n

Upon refinancing, they pay back <\/span>limited partners<\/span><\/a> (passive investors like you and me) some or all of their initial investment. Like the BRRRR strategy, you keep your equity interest in the property. You keep earning cash flow and appreciation month after month, year after year, until eventually, the sponsor sells the property, and you collect your share of profits. <\/span><\/p>\n\n\n\n

Or not. Some sponsors buy properties with no plans to sell, and investors simply keep earning higher cash flow every year that goes by. <\/span><\/p>\n\n\n\n

Examples of Infinite Returns<\/span><\/h2>\n\n\n\n

Our real estate investment club recently invested in an apartment complex, pursuing infinite returns. It\u2019s a dated, poorly managed C-class property in a promising area and by far the worst property in the neighborhood. The total cost of acquisition and renovations per unit comes to around $105,000, and the replacement cost in this area is around $200,000. <\/span><\/p>\n\n\n\n

After two years or so of renovating the exterior and interior units, the sponsor plans to refinance to return our investment capital. We keep our ownership interest indefinitely\u2014and keep collecting cash flow. The sponsor plans to sell the property after seven years or so, but there\u2019s certainly no rush to do so once we all have our money back. <\/span><\/p>\n\n\n\n

Every month that goes by, we earn more cash flow. Every year that goes by, rents rise, and both the cash flow and property value increase. The sponsor may get sick of owning it at some point, but there\u2019s no financial urgency to sell. <\/span><\/p>\n\n\n\n

In fact, we\u2019ve invested in a mobile home park targeting infinite returns, and the sponsor never plans to sell. After the initial refinance to return investors\u2019 capital, he plans to refinance every 10 years to pull out more capital. All the while, the property will continue paying distributions and rising in value. <\/span><\/p>\n\n\n\n

Recycling the Same Investment Capital<\/span><\/h2>\n\n\n\n

If I asked 10 people on the street, \u201cHow much money do you need to invest in order to <\/span>retire<\/span><\/a>?\u201d I\u2019d probably get 10 variations on, \u201cWell, at a 4% withdrawal rate, I\u2019ll need around $1.5 million to retire and have it last 30 years.\u201d <\/span><\/p>\n\n\n\n

They\u2019re not wrong per se. But again, they\u2019re unimaginative. <\/span><\/p>\n\n\n\n

Instead, imagine you invested $50,000 in a BRRRR property deal. After four months of renovations, you refinance and pull your $50,000 back out. You then turn around and reinvest the same $50,000 in another BRRRR deal. <\/span><\/p>\n\n\n\n

Four months later, you refinance again and reinvest again. By the end of the year, you\u2019ve bought three rental properties\u2014and don\u2019t have a cent invested in any of them. You can keep doing this until you have a portfolio of 20, 30, or 40 properties and potentially retire. <\/span><\/p>\n\n\n\n

How much cash did you invest in your retirement portfolio? $50,000. Or maybe $0 if you refinance the last one and don\u2019t reinvest it. <\/span><\/p>\n\n\n\n

The Arguments Against Infinite Returns<\/span><\/h2>\n\n\n\n

To invest for infinite returns, you have to take on debt. And not just a little debt\u2014you often have to leverage a property to the hilt in order to pull your initial investment back out. <\/span><\/p>\n\n\n\n

Remember, you didn\u2019t just invest a down payment. You also coughed up money for closing costs and possibly repairs. When you refinance, you\u2019ll need a high-LTV loan to pull every cent back out. <\/span><\/p>\n\n\n\n

And that says nothing of your cash flow after refinancing. That much leverage could leave you with no cash flow at all or, worse, <\/span>negative cash flow<\/span><\/a>. At that point, you own a liability, not an asset. <\/span><\/p>\n\n\n\n

There\u2019s also a question of your labor investment. Overseeing a complete property renovation is not easy. You might get your investment capital back by refinancing, but you still invested many hours of labor finding the deal, lining up financing, overseeing renovations, lining up the refinancing, renting out the vacant property, and so forth. <\/span><\/p>\n\n\n\n

With a passive real estate syndication, you don\u2019t have a labor investment. But it also takes at least a couple of years for the sponsor to complete renovations, stabilize rents, and refinance to return your investment capital. Even if you get 100% of your investment capital back after two years, you may still have gone two years without any return on your investment. Economists call this opportunity cost\u2014you could have earned money on stocks or other investments during that time but didn\u2019t because your money was locked up in the syndication. <\/span><\/p>\n\n\n\n

Or you might have earned distributions during that time and still collect a return. <\/span><\/p>\n\n\n\n

As a final concern, you can\u2019t predict future interest rates. The investment should still make sense even if high interest rates prevent refinancing when the time comes. <\/span><\/p>\n\n\n\n

While many economists and real estate experts have been <\/span>predicting a recession<\/span><\/a> for the last year\u2014and, with it, lower interest rates\u2014so far they\u2019ve been proven wrong. Last week, I interviewed Greg Butcher of <\/span>BluSky Equity<\/span><\/a> and asked him about real estate risks that not enough investors are talking about right now. His first answer: prolonged high interest rates. <\/span><\/p>\n\n\n\n

\u201cEveryone assumes interest rates will come back down in 2024,\u201d Butcher said. \u201cWhat if they don\u2019t? What if they stay high for several years?\u201d Investments still have to work without relying on an unknowable condition in the future. <\/span><\/p>\n\n\n\n

Should You Invest for Infinite Returns?<\/span><\/h2>\n\n\n\n

Personally, I love investing for infinite returns. We don\u2019t hesitate to propose them in SparkRental\u2019s real estate investment club, and the other club in our space (<\/span>Left Field Investors<\/span><\/a>) doesn\u2019t shy away from them either. <\/span><\/p>\n\n\n\n

But I also acknowledge the criticisms above as legitimate concerns. You need to account for them when you invest for infinite returns. <\/span><\/p>\n\n\n\n

Robert Kiyosaki built a name for himself by teaching that the poor and middle class work for money while the rich put their money to work for them. When you can put the same money to work, not just in a single property, but again and again and again in many different properties, you truly unlock your money\u2019s potential to make you rich. <\/span><\/p>\n\n\n\n

It takes time, but eventually, you can build a vast real estate portfolio using a relatively small amount of money. <\/span><\/p>\n\n\n\n \n

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<\/div>\n\n\n <\/div>\n <\/div><\/div>\n","protected":false},"excerpt":{"rendered":"

Yes, it is possible to generate infinite returns in real estate, but should you invest for that? Here’s what you need to know.<\/p>\n","protected":false},"author":158586,"featured_media":157364,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[4252],"tags":[],"class_list":["post-157376","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-deal-analysis"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/157376","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/158586"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=157376"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/157376\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/157364"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=157376"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=157376"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=157376"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}