“Either make your money work for you or you will always have to work for your money.” — Marshall Sylver
This will be a controversial article.
I’m not a big fan of infinite returns.
I have good friends that have built their business around this model.
I’ve done well with infinite returns myself.
Infinite returns are great in some situations.
But there are some situations where it doesn’t serve your best interests as an investor.
Today, we’ll talk about what an infinite return is and explore different scenarios that will show that sometimes, infinite returns are not the best option.
Let’s get into it!
1. How Infinite Returns Work
In order to explain how infinite returns work, we’re going to use an example.
Let’s say you put $100,000 into a deal.
Over five years, it becomes $200,000.
When the value doubles, you now have $100,000 that you can pull out as new equity and reinvest.
This typically happens through some sort of forced appreciation or market appreciation.
The property value has increased, but there is money left in the deal.
You basically get your $100,000 back.
You’re still cash flowing on an investment you don’t technically have money in.
You can then reinvest the money into another deal or two.
That all sounds awesome!
What’s the catch?
Why don’t I like it?
Like I said before, there’s nothing wrong with infinite returns.
I only think there are other things to consider when approaching these types of deals.
The first and most important consideration you should make is a return on invested equity.
2. Return on Invested Equity
You have $100,000 left in a deal.
What is that money doing for you?
What is the return on your invested equity?
Let’s say you’ve already done a value-add.
The value-add will help the value go up significantly.
Once you get that value increase, you will no longer see the type of returns that you’ve had up to that point.
We typically see value-add deals that have around a 15% return per year.
Half of that 15% will be cash flow.
The other half will be appreciation from the forced appreciation and value-add.
Once you’ve done the value-add, you lose half of the return.
Instead of getting a 15% return per year, you may only get 7% or 8%.
In a lot of situations, it could be better to sell rather than have that low of a return.
That’s the first perspective you should look at when approaching infinite returns.
The second is from the view of an operator.
We operate deals and partner with operators.
As an operator, it’s easier to operate the same deal.
This means I don’t have to cash people out of one deal and put them into another.
A transaction has a lot of work for everyone involved, including investors.
It’s easier if the money stays in.
Your goals may not be to simply maximize return.
My friend Ken McElroy has done multiple deals that are basically infinite returns. I have TONS of respect for Ken.
He’s done multiple refinances over a 20-year period.
But if your goal really is to maximize returns, then as an investor, you always have to ask this question:
Where can I get the highest return for the equity I have?
That $100,000 from the example before is still equity in a deal.
If you sold the property, you could potentially be getting 15% or higher in a new deal.
3. How I Handle This
When it comes to handling refinances, I do it as an investor.
A lot of times we have done a 1031-exchange into other deals.
We returned money to investors.
As a whole, we try to look at it as passive investors.
I love refinances.
I love being able to pull money out.
I love value-add deals.
But also after a value-add, it doesn’t make sense to sell and to move money into another deal.
There are also other things to consider.
Sometimes you have a transaction cost.
Sometimes you have a taxable event.
Refinances are not taxable while selling a deal is taxable.
If you have enough depreciation, you could move your equity into another deal.
There are many deals out there like multifamily, ATMs, or even car washes.
The question really comes down to:
How hard is your money working for you?
What sort of return do you have on the money that is left back in a deal?
Those are my thoughts on infinite returns.
I’d love to know what you think!
Do you not like infinite returns?
Do you love them?
Let us know in the comments below!
Before you leave, make sure to check out our special report about inflation investing. It shares the best choices to invest during an inflationary environment.
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Disclaimer: I am not your investment advisor. This is for educational purposes only. I am not giving specific advice on what you can do. I am simply giving my opinions.