When we invest, if we’re always required to put and keep our capital in the deal, it can become difficult to grow our wealth quickly. Simply because, you’ll always be constraint by how much capital you have to grow.
Invest $100 into a deal, and have it be worth $200, there was a gain of 100%.
Invest $0 into a deal, and have it be worth $200, there was a gain of infinite returns.
How is this possible? I’ll explain shortly.
If you were able to get infinite returns, how many deals could you do?
As many as you’d have time to do. You could do many infinite deals, because you wouldn’t be constrained by having to have more capital to invest each time. You’d be able to keep investing, over and over again. If after every deal you did, you still had the same cash as you had before, you could go on forever.
This is done, all the time. Infinite returns are how people become extraordinarily well off. It accelerates the speed at which you can do more deals.
Here’s a basic example, of how this is done in real estate.
Say an investor purchases a house that has been neglected and in need of work. The house is sold at a discounted rate due to these factors. The real estate investor negotiates and purchases the house at a great price, less than asking, and what it was really worth. They purchase this house for $75k, with a 20% downpayment of $15k.
House Purchase Price: $90k
Mortgage Debt: $72k (80%)
Equity in House: $18k (20%) — The downpayment
Since the investor did their job, like an experienced one would, and purchased it at the right price. Making money when they bought the property. The bank appraises the house at $100k, $10k more than the purchase price. This increases their equity by $10k.
Appraised Value, with Adjusted Debt/Equity Ratios:
New House Appraised Value: $100k
Mortgage Debt: $72k (72%)
Equity In House: $28k (28%)
The investor knows this house has upside, and needs work. They invest an additional $12k into the property. They choose the right improvements to spend their money on, which will result in the largest return. After the renovations, the house is now valued at $130k. An increase of $30k in house value. This adds an additional $30k to their equity.
The total amount of money that has been invested so far is $30k. $18k from the down payment, and $12k from remodels.
Post-Rehab House Appraised Value: $130k
Mortgage Debt: 72k (55%)
Equity In House: 58k (45%)
They investor now has a lot more equity. They now have $58k in equity, far more than the $30k they’ve invested in the building.
Now that their equity is increased, they work with the bank to get all of their original investment capital back. The investors do what’s called a cash-out refinance on the property. This will allow them to take borrow against the house. Since the house has gone up in value, they have more equity and can get cash out. The lenders still require them to have some equity, and require them to keep at least 20% equity in the house. They are willing to loan up to 80% of the house value, an 80% LTV, referred to as Loan to Value. This is what it’d look like.
Cash-Out Refinance Offer:
House Value: $130k
Mortgage Debt is: $72k (55%)
Bank Will Loan Up to: $104k (80% LTV) against the property
Difference between current debt, and 80% LTV: $32k
The bank performs a cash-out refinance. They pay off the old loan ($72k) and establishes a new loan ($104k). The difference between the two amounts is $32k, this is the money that the investor will receive back in cash.
After the Cash-Out Refinance:
Current House Value: $130k
New Mortgage: $104k (80%)
Equity in House: $26k (20%) — reduced by $32k
Cash on Hand: $32k — received cash from equity in house
The investor has now achieved an infinite return.
They originally invited $30k into this deal ($18k down + 12k remodel).
After all said is done. They still own the house, they have a 20% equity stake, and they received all of their cash back, plus a little extra. They can now rent out the house, receive all of the awesome benefits of the real estate investment, and be able to repeat this over and over again. They are out no money.
The return on their investment, is now infinite…
This is the power of infinite returns.
This is a simplistic example. Of course ,in the real world there would be mortgage costs, the banks may have different loan to value requirements, or a whole slew of other challenges could have occurred. Regardless, the principle is what’s important. The principle that is is possible to get infinite returns, and this is basically how it’s done in real estate. It can be done in many other fields as well.
It may take some time and experience, but it is possible. This can be replicated on deals of all shapes and sizes. You don’t need a lot of money to make money. You need to ask how can I, make a lot of money without a lot of money. If you don’t have the money yourself, you can always raise it from others, and have none of your own money in the deal, you’ll always then be receiving an infinite return on your money, because your investors and bankers would then be financing 100% of your deals.
What would you rather do? Have to invest in deals, in which you constantly need to get more capital in order to invest again in something else? Or be able to get infinite returns on your deals, so you can continue going, without being resourced constraint?
I’m not saying it’s easy. I’m saying this is what it is, it’s possible and is done all the time. I had a friend who purchased around 10 properties within 2 years, using for the most part, the same capital that he started with on the first house.
PS: My goal is to create a simple investment book by the end of the year which I’ll share with everyone. If you would like updates on new blog posts, and the release of it. Please give me your email here, and I’ll add you to my list.