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Summary
Here is a video from a live real estate training that one of our principals at Legacy Capital, Doug Fath, spoke at in Baltimore Maryland.
In this video Doug reveals a strategy showing investors how they can achieve an infinite return on their real estate investments. Doug shares a real life example from one of his own real estate investment properties.
Many of our clients are utilizing this same strategy by using Legacy Capital’s money to acquire great deals and to renovate them. Once the property is completed and rented, they are going to a conventional bank to refinance which enables them to pull out all of their money, still own the asset, and continue to make money every month.
If you haven’t done so already click the play button on the video above and discover how you can obtain an infinite return on your real estate investments.
Transcript
The model that I started with would allow me to generate infinite returns and I want to get into that now and talk about how to generate infinite returns, so the first thing is, let’s just get some definitions out of the way. So how do you determine your return on investment? The definition of your return on investment is the money that you made from that investment vs the money you put into that investment. Put simply, you make $10 from $100 that you invested, that’s a ten percent return on your investment. If you made $100 on $100 you invested, that’s 100 percent return on your investment. Pretty good.
How do you get an infinite return on your investment? Well the only way to get an infinite return on your investment is that denominator there, the money you invested, it needs to be zero. You want to be able to set yourself up to generate infinite returns and there’s a couple of ways to do that. The first thing is, which I know you’ve spoken a lot about is, you need to find and discover value. How do wholesalers do that?
Yeah, well that actually is exactly what a wholesaler does distinct from creating value. A wholesaler goes out and discovers value because he’s finding something that’s worth 50 but he or she is tying it up for 20, so there’s a 30 spread there, they’re finding value. They’re discovering value. Does that make sense? If you find that value, you discover that value and you tie that up without any money and then you come over here to the other side and someone pays you for that, that’s an infinite return on your money.
You didn’t spend any money to lock this deal up, or if you did it could be a dollar, $100, maybe even you borrowed that, wherever it came from, that’s an infinite return on your money. That’s one way as a wholesaler, that wholesalers do that, but what I’m going to talk about more is creating value and some of the ways that you can create value in real estate, which is different and distinct from finding value, finding deals at a discount. Does that make sense? Okay. There’s three ways that I typically look at value creation in real estate.
The first is construction. How many people in this room flip property or are looking to flip property? Okay, great, a handful of you. That’s one way that you create value is you take a building and you improve it and you actually improve the value of what that building’s worth. That’s one way. Pretty straight forward. Another way that you can create value is through operations of property management. Okay, so put simply, you’re, at the end of the day, you’re going to increase an NOI, which is net operating income. How you do that is you’re either going to maximize the rents or increase the rents from wherever they are at and/or you’re going to reduce expenses.
If you do one of those or both of those, you’re going to end up with a higher net operating income and a higher profit margin. Does that make sense? You’re increasing the value of that property. The third way is through development and you’re able to improve or create value through development by changing the use of the property. I mentioned and showed you guys some of the images of the properties that I’m working on. We took this old cabinet making factory that’s in a residential area that really doesn’t have much value if it had to remain a cabinet making factory.
There aren’t too many, a lot of manufacturing jobs have gone overseas. There’s not a whole lot of value in that but by going through the process of changing the use and converting that to seven residential lofts in a highly sought after residential area, that property now becomes a lot more valuable. Does that make sense? Great. All right, so when it comes to generating an infinite return, I want to talk about something that I call the infinite wealth formula, which encompasses those three ways that I spoke about creating value.
The first thing you want to look at is the asset criteria. A lot of what you’re going to hear me talk about today as well as tomorrow is setting yourself up for success and how you do that is the structure in which you do things, the business models that you follow are extremely important because if you don’t have that right foundation, if you don’t have the right structure or model, it doesn’t matter what you do, it’s going to be an uphill battle. Whereas when you have that foundation, you have that plan, you have something that’s proven, your likelihood of success drastically increases, right?
The first thing in the asset criteria is the deal has to have equity. Going back to what we were just talking about, finding value or discovering value, essentially you’re getting something at a discount, so when we look at deals we need to have a minimum of 25 percent equity. Put simply, a property’s worth a million bucks, the most that I could pay for that or cost-wise need to be in for will be 750,000. That gives me that 25 percent spread there. Is everyone with me? Okay.
The next thing is, the property has to cash flow. Maybe not at the moment, obviously, if we’re doing renovations to it but once that property is done, that property needs to generate income every month and for me personally, it just has to make at least $1,000 a month, otherwise I’m not interested in looking at it. For you, wherever you’re at, that number could be something else. When I first started, it just had to be cash flow, I didn’t have a minimum number.
It’s the same process and the same way I do things from my first $13,000 purchase to the multi-million dollar projects I’m working on now. It’s all about the process. It’s got to cash flow. Then as long as it has these two things, I’ve got equity in there of at least 25 percent, it cash flows, I then know that I can go cash out. In other words, I can get my money back and when I cash out, how much money do I have left in the deal then? None. Yes, good point but we’re going to walk through a deal right now and just kind of hash that out in a second.
First I’m just going to visually show you some photos. That’s the structure of anytime I look at a deal, this is the first way I look at a deal. Then I’ll in cash on cash return, IRR, other things but like this is my model I’m buying and holding real estate. The first thing you got to do is go find properties to acquire, asset acquisition. Typically we’re finding, as we said, like dilapidated properties that need work.
Once we’ve identified them, step two is we need to maximize the value, going to creating value and we’re going to do that through construction, through physical improvements. These are just some photos. This was a single family rehab that, this was actually one of my, I think, third one I ever did so this is, these are some older photos, but you get an idea of some of the before and after photos of the property. The third thing is to refinance, as we spoke about. That’s where I cash out and get my money back.
Now we’re going to put some numbers to it and we’ll get into your question in a moment. In this scenario, I bought that property for $20,000. When we created value and maximized the value through the renovations, we spent $55,000 renovating it, which meant that I was all in for $75,000. Now let’s see who’s paying attention, so if you go back to my formula, if I was going to be into it for a total of 75,000, how much money should this property be worth at the least?
All right, you’re paying attention. Good, that’s good to know. Exactly, right? It was, it actually comped out and appraised, not comped out, it appraised at $100,000 and then I went and got a mortgage for $75,000, which meant I had no money in the deal. I want to dig into this a little bit from a couple of different standpoints and one of the reasons why I think, again, structure and knowing the end game is so important. I knew that this is what the end game was going to look like because I knew I needed to have the equity in there. I did my due diligence ahead of time.
I went to banks and said, hey, I’m buying property, this and that, when I come to refinance how much money are you going to give me, what loan to value, are you going to give me, typically banks will give you 75 percent. Sometimes 70 percent, sometimes 65 percent, but these are some of the conversations and things that you need to do when you’re doing your due diligence. Once you know what that is, you know what your end game is, now you’ve just got to figure out everything else because you know what your exit is. Does that make sense?
When I first started coming up with the 75 grand, I didn’t have that money, so I went to an investor and said hey, I need 75 grand or $70,000 for this, because you’ve got to pay them interest, they want a return on their money. Borrowed the money from them, renovated the property, maximized the value, then went to the bank, got a mortgage from them for 75,000 and gave that back to the investor. Does that make sense? This is a strategy you can do if you’re using your own money, if it was your 75 in there, you’re using that, when you’re done you go to the bank, you refinance or if you don’t have your own money to use, you can do that with an investor or other sources to raise that money. Does that make sense? Okay.
Then the final result of it is you end up owning an asset with 25 percent equity, you get positive cash flow every month and you have no money in the deal. When you have no money in the deal and you’re getting these types of returns, how many of these deals can you do a year? As many as you want. As many as you can find, as many as you can. For me, that is exactly how I, with my $13,000 property, how I started my real estate investment career and with this same process, have continued to do it again and again, just as many of our clients have done.