How To Get Rich In Real Estate With Infinite Returns
Every day, billions of dollars are being printed. Every day, there are trillions of dollars looking for a home.
The reason there is a growing number of poor, but educated people is that they have never been taught how to access this multi-trillion-dollar pool of money. Most people are standing next to this massive ocean of money, afraid to jump in because they never learned how to swim.
The title of Chapter 6 of Rich Dad Poor Dad is “The Rich Invent Money.” To me, being able to print your own money is one of the better advantages of investing in your financial education. Since the government is printing more money, doesn’t it make sense to print your own money… legally?
Doesn’t printing your own money make more financial sense than working harder and paying higher percentages in taxes, saving money in the bank and losing purchasing power to inflation and taxes, or risking your money for the long term in the stock market?
The way you can print your own money is via a financial term known as return on investment, or ROI.
When you talk to most bankers, financial planners, or real estate brokers, they will tell you that a 5 percent to 12 percent ROI is a good return on your money. Those are returns for a person without much financial education.
Another fairy tale or fear tactic they will say is, “The higher the return, the higher the risks.”
That is absolutely not true—if you have a solid financial education. I always look to achieve infinite returns with my investments.
The way you print your own money is by achieving an infinite return on your money. The definition I use for an infinite return is “money for nothing.” More specifically, I print my own money when I…
- Get back all the money I used to acquire an asset
- Still own the asset
- Enjoy the benefits of the cash flow from the asset.
When I purchased a condo in Maui using 100 percent financing, using none of my own money I put $25 each month into my pocket. That $25 was an infinite return on my investment since I had zero invested.
After that experience, I often say, “My real-life education had begun. I was learning to use other people’s money to make money, a skill a true capitalist must know.”
I know $25 a month is not a lot of money. Yet, it was not the money that was important to me. It was learning a new way of thinking, a way of processing information, and producing a result.
How I Play the Game of Infinite Returns
Let’s say I purchase a rental property—a two-bedroom, two-bath condo for $100,000. I put $20,000 of my money and $80,000 of my banker’s money into the asset. In this example, let’s say I receive a 10 percent cash-on-cash return of $2,000 in net passive income per year. Along with the $2,000 in income, I will receive tax money in the form of depreciation and other expenses, which is an additional phantom income.
In this example, ten years later, I have received back all of my own down payment from just the rent ($2,000 x 10 years = $20,000) and I still have the asset, which means I am still at the table. But my money is off the table. I am still in the game playing with my banker’s money, the tax man’s money, and the house’s money.
I can reinvest my money, the initial $20,000 returned to me, into another property or business, and the process would continue.
In many ways, I have completed the object of that game, but due to appreciation of the underlying asset, the game continues. The best part is that I will continue to receive the $2,000 rental income per year from the asset even though my money is off the table (all my initial investment of $20,000 has been returned to me).
By financial definition, my ROI, return on investment, is infinite.
Tucson is a city with strong job growth from the University of Arizona, the military, and government agencies such as the U.S. Border Patrol. Since many jobs are transient, there is a high demand for rental housing.
So when our friend and Rich Dad Advisor, Ken McElroy told us about a property that was up for sale in Tucson, we had to jump on it. Below are the real numbers from that deal:
Price: $7.6 million ($7.1 million for the 144 units and $500,000 for the vacant land)
Financing: $2.6 million in equity from investors $5 million via a new loan
Plan: Build 108 new units on the 10 acres.
Financing for addition: $5 million to build the 108 new units. The existing property and the 10 acres were used as collateral for the new $5 million construction loan.
Total units: 252 units when complete
Total package: $2.6 million equity + $10 million debt
New basis: $12.6 million
New appraisal: $18 million. An increase in rents increased the appraisal.
New financing: 75 percent leverage = $13.5 million ($18 million x 75 percent = $13.5 million)
Paid off old loans: $13.5 million – $10.0 million = $3.5 million
Return to investors: $3.5 million
Net transaction: Kim and I invested $1 million. From the $3.5 million return to investors, we received $1.4 million. $1.4 million is reinvested in a 350-unit property in Oklahoma.
Taxes on $1.4 million: 0
Today, Kim, Ken, and I still own the 252 units in Tucson. We receive monthly income from the property. Since we have zero invested in the property, our ROI (return on investment) is infinite.
Even Higher Returns
For the sake of this example, let’s say the property in our original example appreciates to $180,000. In order to follow the tax rules, I could borrow a portion of the $80,000 of appreciation in the form of an equity refinance. Refinancing this $180,000 property, I could receive an extra $70,000 in cash tax-free (since it is equity in the property, not income), while I continue to own and control the asset.
So in ten years, I would get all of my $20,000 initial investment money back from passive income, which is tax-free money due to phantom depreciation deductions. This is possibly an extra $70,000 from the appreciation in the equity, and I continue controlling the asset (which keeps sending me passive income), all while I move my money into another asset.
Let’s say I take my $20,000 and my $70,000, which means my money is now off the table related to the first asset, and I now use this $90,000 to purchase a $450,000 asset. Ten years later, I control the original $100,000 asset, now worth $180,000. I continue to receive at least $2,000-a-year income from that property. I have now moved $90,000 into a $450,000 asset and could be receiving approximately $10,000 a year income from the second property.
My next objective is to repeat the process with both of these assets: Pull additional equity from both assets through refinancing and reinvest it into the purchase of an even bigger third asset.
By understanding the object of infinite returns, which is to get your money off the table as quickly as possible to invest in another asset, a professional investor can get ahead faster by using the velocity of money.
One of the reasons the rich are getting richer is because their money is moving. Most other people have their money parked in their homes and in their retirement accounts, investing for the long term.
Editor, Rich Dad Poor Dad Daily