What’s better than a high return on investment? An infinite return on investment.
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.
What Are Infinite Returns?
If you recall your middle school math, any return on a $0 investment is infinite (e.g., $1 divided by $0). You didn’t invest any money, so even a single dollar represents an infinite return on your nonexistent investment.
“Well, that’s all well and good, Brian, but hasn’t anyone ever told you that it takes money to make money? You can’t own something for nothing.”
That’s only partially true in this case. You do need to invest some money initially—but then you can pull it back out later through refinancing. And no, it does not take money to make money, as delivery drivers earning $170,000 a year can tell you. Unimaginative people are quick to tell you what can’t be done. But I digress.
How to Invest for Infinite Returns
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.
The BRRRR method
I started my real estate investing career following the BRRRR strategy.
You buy a fixer-upper, force equity by renovating it, rent it out, and then you refinance it based on the after-repair value (ARV). In the refinancing, you can pull out some or all of the money you invested initially.
If you pull out all the cash you invested, congratulations—you 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.
Syndications with infinite returns
Real estate syndications 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.
Upon refinancing, they pay back limited partners (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.
Or not. Some sponsors buy properties with no plans to sell, and investors simply keep earning higher cash flow every year that goes by.
Examples of Infinite Returns
Our real estate investment club recently invested in an apartment complex, pursuing infinite returns. It’s 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.
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—and keep collecting cash flow. The sponsor plans to sell the property after seven years or so, but there’s certainly no rush to do so once we all have our money back.
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’s no financial urgency to sell.
In fact, we’ve invested in a mobile home park targeting infinite returns, and the sponsor never plans to sell. After the initial refinance to return investors’ 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.
Recycling the Same Investment Capital
If I asked 10 people on the street, “How much money do you need to invest in order to retire?” I’d probably get 10 variations on, “Well, at a 4% withdrawal rate, I’ll need around $1.5 million to retire and have it last 30 years.”
They’re not wrong per se. But again, they’re unimaginative.
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.
Four months later, you refinance again and reinvest again. By the end of the year, you’ve bought three rental properties—and don’t 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.
How much cash did you invest in your retirement portfolio? $50,000. Or maybe $0 if you refinance the last one and don’t reinvest it.
The Arguments Against Infinite Returns
To invest for infinite returns, you have to take on debt. And not just a little debt—you often have to leverage a property to the hilt in order to pull your initial investment back out.
Remember, you didn’t just invest a down payment. You also coughed up money for closing costs and possibly repairs. When you refinance, you’ll need a high-LTV loan to pull every cent back out.
And that says nothing of your cash flow after refinancing. That much leverage could leave you with no cash flow at all or, worse, negative cash flow. At that point, you own a liability, not an asset.
There’s 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.
With a passive real estate syndication, you don’t 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—you could have earned money on stocks or other investments during that time but didn’t because your money was locked up in the syndication.
Or you might have earned distributions during that time and still collect a return.
As a final concern, you can’t predict future interest rates. The investment should still make sense even if high interest rates prevent refinancing when the time comes.
While many economists and real estate experts have been predicting a recession for the last year—and, with it, lower interest rates—so far they’ve been proven wrong. Last week, I interviewed Greg Butcher of BluSky Equity and asked him about real estate risks that not enough investors are talking about right now. His first answer: prolonged high interest rates.
“Everyone assumes interest rates will come back down in 2024,” Butcher said. “What if they don’t? What if they stay high for several years?” Investments still have to work without relying on an unknowable condition in the future.
Should You Invest for Infinite Returns?
Personally, I love investing for infinite returns. We don’t hesitate to propose them in SparkRental’s real estate investment club, and the other club in our space (Left Field Investors) doesn’t shy away from them either.
But I also acknowledge the criticisms above as legitimate concerns. You need to account for them when you invest for infinite returns.
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’s potential to make you rich.
It takes time, but eventually, you can build a vast real estate portfolio using a relatively small amount of money.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.