#92: How to Get an Infinite Return Investing in Real Estate

Welcome to the Passive Income MD Podcast, where we talk about creating your ideal life through multiple streams of income. I'm your host, Peter Kim. If you enjoy hearing about this stuff, make sure to hit subscribe so I can bring it to you every week. Now let's get on with the show. All right. Hello, everyone. Hope you've had a great week. We're gonna be talking this week about a concept called an infinite return when it comes to investing in real estate. If that doesn't sound appealing to you, then you're probably listening to the wrong podcast. But before we get to that, I just want to remind people, give a little hint, a little teaser, that on March 9th through 13th, depending on when you're listening to this, we're gonna be having our annual Leverage and Growth summit for physicians. For those of you who haven't participated in it, you're then not one of the tens of thousands who have been a part of it in the past where we've had, you know, brought together speakers, brought together experts in various fields, people who, and physicians in particular, who have created businesses, done different types of investments to ultimately create life on their own terms. They've been able to figure out other ways to create streams of income, and it's really allowed them to create the life in and out of medicine in terms of how they wanted it to be, right, to be super intentional about how they build their life. And so if you're interested in stories like that and there's be some strategies involved and you want to be part of this whole community learning about this and just really on fire for figuring out, again, how to create leverage to create your ideal life. Then check out the Leverage and Growth Summit, March 9th through 13th. Look out for announcements about that. It's going to be absolutely free. And we'll be talking all about that very soon. So let's get back to this week's episode. We're going to be talking about how to get an infinite return investing in real estate. You know, first time I heard about that term, I really had a hard time wrapping my mind around it. Infinite returns. Like, you know, what does that mean? Right? I've heard of things like return on investment or annualized returns, and I use those terms a lot, and I look at those terms to figure out whether an investment is worth it or not. But an infinite return, I mean, I don't know. Again, it sounds interesting to me. I don't know if it does for you, but it just sounded like some sort of marketing buzzword. However, I decided to really Just take a deeper dive into the concept. And I'm going to talk about that on this week's episode. So what is an infinite return? I actually found that the definition is pretty simple. You know, an infinite return or infinite returns, they're achieved when you no longer have any money in a deal, but you're still receiving the benefits of cash flow and other returns, even though, again, your money's out of the deal. Like when a property sells, for example, let's say you invest $100,000 into a syndication or a passive real estate deal, and you're going to get a 10% ownership stake, for example. Now, over the next few years, let's say you get enough cash flow that your initial capital is returned to you pretty quickly, like your full $100,000 is returned back to you, right? But the deal still continues to go on. You still keep your 10% stake in the investment. So then you can continue to receive distributions and cash flow based on your equity position, that 10%. And in the future, if the property is sold, you would get a profit again based on your percentage ownership. So I say that, you know, at the point when you receive that full $100,000 initial investment back, you no longer have any skin in the game, right? You have no longer any investment in the deal. Now that money can be spent, can be moved, invested elsewhere. You can do whatever you want with that money. And also that technically it was really almost virtually impossible to lose money, right? It's like everything that you're playing with from now on is it's all house money for those who've been to Vegas and understand that concept. So everything is just true gains from that. You know, from that point on, when you calculate something called return on investment or roi, the formula is this. So ROI equals the net profit over the amount invested and times 100 to just to get that percentage. So what it means is, like, how much profit you get over how much you initially put into the deal, right? That's what you want to know. That's your ROI. So if you received, let's say, $10,000 in distributions, that's your net profit. And let's say your amount invested is $100,000, and that's a 10% return on investment. Now, let's just say you still get that $10,000 distribution, but you no longer have any money invested in the deal. So it's zero down in that denominator. Then that $10,000 over zero, it actually equals infinity, means infinite returns. You're getting infinite returns based on the Money you have on the deal. And so you receive that investment income with really just no money tied up. And at that point, really there's no risk involved. And, you know, I found that this is kind of like the holy grail of investing in a lot of ways where you get to a point where you really have mitigated risk, low risk, because your money's out of the deal, but you have potentially, you know, unlimited potential upside, right? And I found that there are really two common ways to achieve these kind of infinite returns, specifically in real estate. So I'm gonna be talking about two of them. They're number one, no money down purchases, and then two, cash out refinance deals. So don't worry if you don't know what those are. We're gonna talk all about these things really quickly in this episode. Number one, no money down purchases. So it's exactly what it sounds like, right? I mean, we don't see as much of it today, but people were used to doing this in the past. You purchase a property without a down payment, meaning you pick up that property. You know, at least today you have to put down a sizable down payment. But even in today's world, I know that many physicians that I've talked to or any other really clever investors, they've been able to purchase properties using no money down, and they found some great success. I know that with today's conventional lending and these banks, they're not really willing to give you a hundred percent. And probably for good reason. That's why we went through the whole financial Crisis back in 2008. However, I found that if you do get creative enough, there are still other ways to make it happen. For example, I know some investors who have had the seller of the property agree to carry the loan themselves for the full amount of the purchase. So in other words, like, instead of having a bank lend you money for the investment, the seller agrees to sell the property to you and they agree to really cover the loan. Why would they do that? Well, they get some guaranteed, you know, income from that, they get guaranteed cash flow from that, and they get to charge interest just like the bank. It's a very, very safe position in terms of an investment. And then if you decide to not pay, just like you don't for the bank, hey, they get to keep their own property anyways. They know their own property, they get to keep collateral, the collaterals on the property, and in the meanwhile, they just get a steady cash flow return with interest involved. So you would be paying the seller on a Monthly basis, just as if you are getting a loan from them. And yes, you can create a whole loan term just like you do a normal bank, like the amount of the loan, the interest rate, the length of the term. So if this is like a rental property, the investor can receive cash flow from the property even while the seller carries the debt. So why this is powerful, especially if there's no money tied up in the deal. This can result in more like that infinite return scenario where really no money is into the deal initially, but you're still able to benefit from the cash flow the property provides. Now I have seen in the past, and these are a little bit harder to find. Some of these physician home loans where they're able to buy a home using a 0% down, those are pretty rare and hard to come by these days. But if you still look, they may be present at certain price points. Right. Um, but for some people, I know some of these physicians, they bought a 0%, you know, home with a 0% down loan. You know, they pay the monthly interest and that sort of thing. Then they sold the home after it appreciated value, they gained a profit. All of this without making initial down payment. So it's pretty powerful, right? They created a profit without putting any money down initially. Now they had to pay the mortgage as they went, but again, at the end of the day, they were able to sell and gather and get huge amount of profit throughout for that, especially if the home value went up over time. Right. This whole scenario is called a no money down purchase. Right. And it can result in what we talked about, that infinite return scenario. That can be really powerful. Now number two, the one that I see more people use is this whole cash out refinance strategy. Now this situation is a little bit more interesting to me and more of a strategy that I look to take advantage of whenever I look for investment properties for myself or invest in syndications or passive real estate opportunities. So, real brief, here's a process. Number one, somebody purchases a rental property, two, they raise its value, right? They increase the value of it. Forced appreciation, it's also called by increasing what's called the net operating income. So the underlying income that it produces. So they might like rehab, they might renovate, increase rents over time. And then eventually when this property has an increased value, whether it's the, the fact that they increase the value by, you know, raising rents, but also maybe the market has gotten better as well. Like two of those put together, they then refinance the property with the bank. And so the bank appraises it higher value, and it allows you to actually take out often, sometimes your initial down payment, maybe even a little more, possibly, and that initial rehab cost. You're able to take that cash out if you want. And at that point, you still own the property, but you've taken out your initial investment. So you can move that initial investment onto another property, kind of recycle that capital and move it on. So in essence, at this point, after this whole process has happened, they have none of their own initial capital in the deal, but they still own the property and hopefully are still receiving cash flow from it. And if they decide to sell it down the line, they again profit from that as well. Now, for the purposes of this episode, without going too long, I'm not going to talk about, you know, how, you know, total force appreciation works, but it's really based a lot on the net operating income, which is, you know, your income minus expenses for a property income is typically rent, whatever other income that you might get, minus the expenses involved in running that property. So if you can figure out a way to increase income, decreases expenses, then you've got a greater net operating income, which also tends to increase the property value significantly. Now, I know some of you are asking, like, how do banks do the refinance and lending? I will tell you that they base their lending on a loan to value percentage. For example, I don't know if you bought your own home, like most lenders are willing to, you know, lend about 80, up to 80% of the value of the property. So they make you bring in 20% on your own. That's for like a safety margin for themselves. You know, when it comes to commercial properties, you know, they do the same. Sometimes it's 80%, sometimes it's 75%. Here's an example. So let's say you put down $250,000. You know, you buy a $1 million building, so you put down 25%. So you got, you know, you put down two hundred and fifty, and you got a $750,000 loan from the bank. This is a 75% loan of value. So $750,000 loan for a $1 million value building. So hopefully that's pretty clear. Let's say you renovate the property, you improve operations, you increase rents, you drop expenses. And over time, that property's value, you know, based on the current market value, it's increased. So let's say over three, four years, the value of the property is, you know, it's no longer 1 million, it's now 1.5 according to the market. So now you find the bank willing to refi, you know, willing to lend again based on that 75% loan of value again, like you got before. So 75% of 1.5, you know, that's actually a $1.125 million loan. Now, if you remember, before, you got a $750,000 loan. Now instead, they're willing to give you a $1.125 million loan. Now, that's a difference of $375,000. Now remember, you put in $250,000 to buy this building initially, probably put some money in for rehab. But what that means is that your initial cost of capital, meaning the amount that you initially put in, even with rehab, you're able to get that back in cash. You were able to take that $375,000 back off the table. And then, you know, you can use that wherever you want. And you still own the building. Yes, you have a bigger loan now, but hopefully you've increased the value of the building, so it increases the cash flow. So that tends to cover the mortgage, no problem. And you're still getting some cash flow on top of it. But then now you have this big pile of cash again. The money you put in initially, it comes back out to you, and you can now recycle that and buy a whole nother property. Now, this whole process, just so you know, it's tax free until you sell that building. That's what's an amazing thing about this whole process. So that's what's known as cash out, refinance. And at this point, you've essentially achieved infinite return status. So, like, moving forward, you have no more of your own real personal money in the deal, but you have the property, you have cash flow, and you have that equity appreciation when you sell. So that's for your own property. That's a powerful thing. I've used that strategy before to acquire multiple buildings. You buy one, cash out, refinance, and, and you buy another one using that cash again. And so you're able to accumulate units, accumulate your net worth using that strategy. Now, I know what some of you are asking, are you able to do that when you invest in syndications? I mentioned that, like, is that possible? And absolutely, it's true. When I invest in syndications or passive real estate investments, that's actually one of the strategies. I ask them if that's something that they tend to do. Right. I try to seek that out. So, like, instead of you doing all the work to Find the property, renovate it, increase rents, manage expenses, you know, do the refinancing. Basically, you are leveraging a team of professionals to accomplish this. You know, for those of you who might have a little bit more cash than you do, have time. You know, have time. That might be a great way of doing it. And let me show you how it works with syndications too. I mean, my very first investment was a syndication deal, right? My very first syndication. Same kind of thing happened. I invested at this point, I will tell you, it was $25,000 in a syndication deal. I own 1.04% of a building as a larger building. And what happened was that over time I received some distributions. And as they refi the property, as the value of that property went up, they refinance, they pull out cash, they distributed that back to their initial investors. So I got enough of those distributions that after a few years, actually I got all my capital back. But I was still a 1.04% owner of that apartment building. And so I've been receiving distributions since that point. You know, that's been another three, four years since I've gotten my money back. And I continue to receive quarterly distributions. That's hundreds of dollars every quarter. And when that property sells, which has gone up quite a bit in value, whatever that profit might be, I get my percentage stake as well. So I have currently zero money in this deal. That money's been moved out into other investments, other passive investments, and I'm still getting a nice cash return on it. So really, this is the exact scenario where it's an infinite return in terms of cash flow, in terms of return on investment, because I have no money in the deal. I haven't had money in this deal for years. And it's moved on and allowed me to actually, you know, have equity in other deals. So let me tell you, this property that initially they bought for about $6 million that I bought for is now, last time they appraised it recently, it's. It's valued over double the amount, so 13.5 million or so. So if that sold, I'd be receiving nice profit. However, right now they're just keeping the property, keeping it for cash flow. People and all the investors tend to be happy with the cash flow they're receiving, especially cause it's an infinite return. You know, we've all taken our money out and moved on elsewhere. So all this stuff has been tax free because of, you know, all the returns that I've gotten. All these, the. The way it happens with refi. None of these have been tax triggers. And so at this point, I really haven't had to worry about taxes at all in that whole point. So I know. Here's the question. Should you be looking for infinite returns in your investing? You know, possibly. It's one of the great benefits of investing in real estate. It's a way to achieve great returns as well as a way to kind of recycle your capital to get your capital back to move on to other things. You know, it's honestly infinite returns more than a buzzword. It's just a powerful strategy to maximize your returns while reducing risk. Right. Which is what is really the holy grail of investing and stuff that many of you are looking for. And I've been looking for it. It's just one of the strategies. It's not the only strategy out there, but it's a tool that I use to help really achieve the goals that I want. So I mean, I'm just curious if this concept sounds appealing to you, Is it interesting to you? Would you want to find out more about it? Have you utilized this strategy? Have you seen it in your own investments? I'm just curious. Let us know Let us know on our Facebook group Passive Income Docs. Write back to us, email us, let us know how it's going. And so have a great week. Take care and let's talk again soon. Enjoy the show. Let me know by dropping a review in the podcast app you're listening to us in. And if you haven't already, make sure to hit subscribe. Are you part of our community yet? Join thousands of physicians who are also on this journey to creating their ideal lives through multiple streams of income. You can join us on our Facebook group Passive Income Docs and you can always learn more at our website, passiveincomemd.com thanks again for allowing me to be a part of your journey. See you next time.