Earning infinite returns on your investment is one of the most exciting accomplishments of a great real estate invest. It doesn’t happen on every deal, but when it does, it’s awesome. Infinite returns are achieved when you no longer have any of your money invested in a property, but you still own it and the property is still generating income. You can earn infinite returns in real estate through two strategies. One you’ve probably heard a lot about, the other isn’t quite as well known. But both a extremely effective when you use them at the right time on the right opportunity.
Most real estate investors have heard of “no money down” real estate investment strategy. In “no money down” investing, the investor finds a very motivated seller that is willing carry a loan for all of the purchase amount or at least the down payment amount. This allows the investor to buy or take over the property without actually having to take any money out of his pocket. So, by it’s definition, any returns you earn through no money down deals are infinite as you don’t have any money invested in the real estate in the first place. It’s a great strategy to use if you can find a motivated seller that is willing to assist you.
There are two major problems with this strategy on most properties. The first is that you have to find a motivated seller that is willing to participate. Second, if they aren’t a very motivated seller, you usually have to overpay for the property to get the seller to agree. In both situations, you have to have the sellers’ participation and that just isn’t an option in most competitive buying situations or highly desirable properties. If you try to use this “no money down” investment strategy in a competitive buying situation, you don’t have a chance. The seller is going to go with your competition’s offer that has “no-strings-attached.”
Let me suggest an alternative strategy for you to consider. Let me suggest that you try a strategy that isn’t plagued by the major issues of the “no money down” investment strategy. This strategy doesn’t require the seller’s participation or even that they have the knowledge that you are using it. Yet, it still allows you to earn infinite returns on your investment. You can even eventually end up with little to none of your own money in the property. It’s called a cash-out refinance.
In a cash-out refinance the investment strategy is buy a property, increase its value (usually by at least 20-25%), and then refinance the property at a high enough amount to get your original investment out. When you do a “cash-out refinance” you end up with your initial money you put down back in your pocket and you still own the property. If it’s a cash flow producing property, you still get all the benefits like cash flow and appreciation. However, now instead of calculating your return on investment by taking what you earn divided by what you have invested in the property, your returns are now infinite because you don’t have any money still invested in the property. Pretty amazing, right? Infinite returns – I can get used to that.
A “cash-out refinance” has several advantages over the traditional “no money down” deal.
- You can use it in a competitive bidding situation, allowing you to buy better properties
- The Seller doesn’t have to participate or have knowledge of your plans
- You can still bring in traditional financing
When is a “cash-out refinance” appropriate?
A “cash-out refinance” should be considered when you are looking at investment properties where you think you’ll be able to greatly increase the value of the property. This happens a lot in rehabs, flips, and repositioning opportunities where you buy a distressed asset and plan on fixing it. It can also happen in properties that have appreciated a lot over time.
Things to consider before using a “cash-out refinance”:
- You are increasing the debt on the property so you need to make sure you don’t over-leverage the investment, and make sure you can still cover the debt payments after refinance.
- A cash-out refinance only works when you have a property where you can significantly increase the value.
- Financing can change all the time so what works today may not work in the future. Be sure to have multiple exit strategies.
- You still have to come up with the amount to put down when you initially buy the property.
A “cash-out refinance” does not work on every property and in every situation. However, it can be an amazing strategy to use and can produce infinite returns to the investor. It has many advantages over the “no money down” strategy because it can be used in competitive bidding situations and doesn’t require the seller’s knowledge or participation.
Before using this strategy, you have to know that you can increase the value significantly and that the property can support the extra debt once you do. We usually use this strategy on properties where we are doing a rehabilitation or repositioning and plan on increasing the value by at least 25%.
This strategy also depends on the financing options that you have at the time you want to refinance. Not every lender will let you do a cash-out refinance, but if you have a strong investment property and have created enough value, it can be done.
If you are looking for infinite returns (and aren’t we all?), “cash-out refinance” and “no money down” investment strategies should be considered depending on the situation. When used properly, either one can provide infinite returns on your investment. “No money down” doesn’t require any cash up front, but is difficult to use in competitive situations or with highly desirable properties. On the other hand, cash-out refinances require money up front, but can work in competitive situations. One of my favorite aspects of cash-out refinances is that it allows you to get your original investment out, but doesn’t require you to sell the property to enjoy the extra value you’ve created.
Just remember, no investment strategy is right for every situation. Make sure your investment property is a good candidate. Remember, always support your investments with multiple exit strategies so that you’ll be fine no matter what the future holds.