How to use Real Estate to get an infinite return on your money.
by James Miller
I am going to start off by pulling back the curtain on the great OZ of “infinite return”.
An infinite return on your money can happen when you have nothing in an investment. While “infinite return” sounds like a large amount of money- after all infinity is a really big thing– the way the math works out, it doesn’t have to be large at all.
For example, if you get a dollar back from an investment that you have no money in, you have received an infinite Return on Investment or ROI.
In fact I really think it should be called a “division by zero” rate of return on your money, as that is what the calculator tells me if I try to calculate it.
We have gotten an infinite return a few times with Real Estate.
Here is an example of one method we used on a property we bought a couple years ago.
We bought a fixer upper house for $50,000. We got the sellers to give us a second mortgage for $10,000 which the bank treated as a down payment. We left the closing with a net of $800 being deposited into our account.
As sexy as that was, it still didn’t give us our “infinite return”.
The house needed to be repaired before anyone could live in it. We spent about $5000 on fixes like new windows, carpeting, and replacing the radiator hose that they had used on the bathtub drain instead of the proper fix – a $2 PVC elbow.
Once fixed up, we sold the three bedroom one bath house on a Lease Option, or “rent to own” contract, we let the buyer in light, allowing them to put down only $3000.
We held the property a year this way, netting about a $100 per month cash flow. After one year, the fist mortgage was “seasoned”, and the value of the property had increased due to the repairs we made. Because of these two factors, we were able to refinance everything we owed into a new first, paying off the original first and second, the repair bills and were able to take out an additional $3,000 to put in our pocket.
While our cash on cash ROI for the first year was only around 60%, $1200 annually on the $2000 we had left in the property, the cash on cash return became infinite once we pulled out the remaining money we had invested in it.
I should take a moment to let you know how that deal worked out:
The tenant buyer we put in the house did not exercise their option to purchase in the allotted two year time frame. This worked out ok for us as he forfeited the $3000 he put own, and became a tenant only. We raised the rent from $600 to a market rate of $650.00 per month.
We would have every right to kick him out, as our intention was to sell and he had two years to get financed, but we don’t like to do that if we don’t have to.
If they so desire, we try to let the person living in a lease option home stay on as a tenant, if they miss the exercise date.
It also very hard to kick a young couple out who have paid diligently over the past two years, and it really doesn’t hurt us to let them stay.
If they ever want to buy the house from us we would honor that as well, but at a new higher market rate and not at the price we would have let have it for a few years ago.
Here are the steps to receiving an infinite return for the example I just described:
1) Locate a fixer upper type property. Make sure that 70% of after repaired value of the property is enough to pay off everything you will invest in it.
Example: Property acquisition cost is $50,000. Repairs and holding costs total $20,000. After repaired vale of the property should be at least $100,000.
Try to get a seller second on the place for a minimum of one year, negotiate for no interest, and no payments if possible.
Make sure the property will net positive cash flow by at least 15% of the monthly income. Monthly income will typically need to be at least 1% of loan against the property in order to just squeak by cash flow wise.
2) Repair the property, put a tenant, or tenant buyer in place.
3) After holding the property for one year refinance the property paying off everything that you have invested in it and possibly taking cash out. Be careful not to take too much out as the more you take out, the more you will cut into the monthly cash flow.
You should have a positive cash flow with now money invested, giving you an infinite return.
As a final thought you should note that you can also have negative “infinite returns” if you lose money each month on an investment.
Leverage works both ways.