Transcription
So over the past 30 years, I've grown my real estate portfolio to well over 10,000 apartments. But there's one strategy that's changed everything, and that's an infinite return. Let me show you how it works.
So the word infinite or infinity means something with no end. So this is traditionally the infinite symbol. In this particular case, I'm talking about infinite returns. There are many ways to get an infinite return. And one of those is a zero down strategy. Now if you think about it, if you have a zero and any deal, $1 divided by zero is infinite, this can be buying something with 100% financing. So you're using OPM or other people's money, but you have zero in the deal. And the goal, of course, is going to be the same in both of these strategies.
The second one is OPM or other people's money. Now OPM is in the form of either debt or equity. And I'm going to show you in an example in a minute. In both of these cases, we're using debt or financing. But the goal of course is to keep the property. The goal is to have cash flow long term. So the strategy is more of a cash flow strategy and not a capital gains strategy. So the people that argue with infinite return are the ones that actually need to sell.
For example, let's say you're a real estate investor now and you want access to all that equity in a property that you own and you sell it. Your income stream then stops. And now, of course, you no longer have a return at all. And this particular case, in both examples I'm talking about long term ownership using the tax benefits that we all have from owning real estate and continuing the passive income and the cash flow strategy in perpetuity until there's no end. So I'm definitely not talking about a buy and sell strategy where we're trying to capitalize on some kind of big equity or forced equity or appreciation at all. So people that are going to argue with this strategy are the people that have a beginning and an end to all investments.
This strategy is a lot more strategic. It's meant to have long term passive income and cash flow to free you up for your time up and free up all that anxiety and stress around money so that you can actually live the way you want to. Instead of having to time markets from year to year. So this strategy is not just meant for the multifamily example that I'm going to give you. It can be used for the house, can be used for retail, it can be used for the business. It doesn't really matter. But in this particular case I'm in the multifamily business.
So when I'm looking for a property, let's say a 200 unit property, I'm going to pay $20 million for this property. I'm going to go to the bank, and I'm going to look for what I call OPM or other people's money. I don't need the $5 million in equity by 200 units for $20 million. Now, I definitely am going to want to invest my money in this, but if I don't have it, it doesn't stop me from looking because I know that I can get the $5 million from various sources. I can get it from individuals, high net worth people, family offices. I can even go to Wall Street if I want. So the debt and the equity never stop me from taking a look for this infinite return strategy.
So in this particular case, the bank gave us $15 million in debt, which represents 75% loan to value. Those of you that are trying to buy a car or buy a house, you know that you go to a bank or somewhere and they give you a loan to be able to finance that. It's no different with 200 units for $20 million. It's the exact same process. And you also know that they also want you to have a little bit of equity involved in most deals, no matter what it is. They don't want to give you 100% financing, but on the ones that you do get 100% financing, you actually can hit your infinite returns even better. But the one thing you're going to always want to make sure if you're trying to get 100% financing, is that it cash flows each and every month.
So in this particular case, when we buy this property for $20 million, what I really looking for is an operational flaw with the existing ownership or management. That's what I'm always looking for. And so I call that forced equity. So I'm looking for a property let's say that's mismanaged or that has an absentee owner. I'm actually in escrow on a property just like this right now with an owner that has had a property for 25 years. They live out of state. They rarely come to town, and the rents at the property are severely under market. Now these properties are everywhere in a town near you. Trust me when I mean, there's a lot of inefficiencies in real estate. And you can always find what I call forced equity sitting in any real estate deal. So this is exactly what we just did on a property that we bought in Vegas. Now the units are over 300, but the rent growth is about the same. And so the property is a little larger. But it's exactly what we're going to do on a property that we just bought in Henderson, Nevada that we just closed on.
So if you're an accredited investor, click here, take a look at our business plans. Or you can see this exact strategy on a couple deals that we have on our on our website right now. It's important to understand that I saw the infinite return strategy before I bought the property. In other words, I wouldn't even touch the property unless I understood that there was an infinite return strategy before I purchased it.
So now let's take a look at the strategy itself. So and this property, there was about a $200 per unit per month left in the rents. So in other words, this particular property was under rented and they had a high occupancy. But I knew there was about a $200 rent left in each and every unit based on what was going on in the current market. This happens more often than you think. Now, if we just look at the property from just this one strategy, the most important thing that you can do is go out and make sure that after you buy this, that this strategy works. You're going to want to make sure that comparable properties are renting for at least $200 or more per unit. In other words, when you buy it and you raise the rents by $200, you better make sure this works.
So that is one of the biggest factors of buying this property, is to make sure that these units really are under market, and to make sure that after you buy it, you can raise those rents to $200 over a period of time when people are naturally progressively moving in and out of the property. So this can be done over time without disrupting the current tenants that are living at the property. You. If you just focus on the people that are moving out and testing this on turnover, you'll find that this can be done very easily, seamlessly, without disrupting the cash flow of the existing asset after you purchase it. So this strategy is easily going to take at least two years, because a 200 unit property takes almost two years to turn over two times. So let's say you have 50 to 60 to 70% turnover. Let's say 50% is 100 units a year. So you might turnover about 200 units in a period of about two years. This would be a two year strategy.
But the goal of course would be if you're $200 a unit times 200 times 12 months, you have about a $480,000 increase in the income just from raising the rents to market in a period of just two years, which will go straight to the bottom line and will increase your net operating income by about $480,000. Then you take a look at the market capitalization rate. If you don't know what that is, just click on this video here. So the next thing is every market has a capitalization rate. So right now the cap rates are anywhere from 5 to 6%. I used a 6% which is probably at the high end. Which means that if you take a 6% and you divide it into the $480,000, what you have is you have about an $8 million value add.
Now let's just stop right here because what I'm showing is by managing the property to market and just growing the rents by $480,000 a year and putting a 6% capitalization rate. I show about an $8 million of forced equity. So now already I know that I've gone from $20 million to $28 million in value just by using this one strategy. And of course, when we're buying a property, there are multiple strategies on the expense side. In addition to that, there's a lots of other things you could do on the income side. But for now, we're just going to focus on one strategy, which is bringing the rents to market by $200, which equates to about $480,000 in a year. It does take time. You have to wait for turnover. There's a little bit of a lag here, but of course with our real estate investing, we're playing the long game. This is a cash flow property, not a capital gain property. I'm not trying to sell the property for $28 million. What I'm trying to do is get to our infinite return.
So the second thing that I do is after we get the increase of $480,000 on the income, and I've grown the value to $28 million, I do the exact same thing. I go back to the exact same bank and I say, can you give me a 75% loan? And they appraise the property based on this new cash flow. So now we take 75% of the $28 million, which is the new value based on our income growth strategy. And they give me a $21 million loan. So now I've got a $21 million loan, which a lot of you would call a cash out refinance. So that's exactly what I'm going to do. And the reason I was able to increase the value was through this income strategy. And I'm just going back and asking the bank to do the exact same terms that they gave me when I first bought the property. Which was a 75% loan to value, which in this particular case turned into about a $21 million loan.
So I take this $21 million and I do a cash out refi. And don't forget, I still have $7 million of equity, according to the appraisal, according to the bank, because I'm only borrowing 75% of the new value. I take this $21 million and I go pay all this off. So I pay off the first, which is a $15 million loan from the bank that I got it from originally. And I pay back the investors their $5 million, and I've got about another million dollars to put in my pocket or distribute amongst the investors. So at this point, we are completely infinite, because now all the investors have all of their money back. The original bank that we got the loan is paid back. All I've done is a cash out refi and just refi out both the equity and debt from the original deal that we did. I've got everyone all their money back and guess what? My investors stay in this deal.
So at this point, just like zero down, we actually used OPM other people's money. And this can be yours. It can be a group of investors. It doesn't really matter. But the entire deal works. As a result of this strategy right here, we saw money sitting inside of the round roll. We saw better efficiencies. We saw an ability to grow their net operating income, which we did. And the bank rewarded us for it because we were able to get now a $21 million cash out refi, pay all the investors back. And at this point, there's no reason to sell this property because there's just reoccurring cash flow coming in from the increase of almost $500,000 in income to pay back everyone each and every month.
So now these people got all their money back and they're getting reoccurring rental income with no investment. So at this point they literally have an infinite return. They have no money in the deal, and they have reoccurring passive income. And of course, as you're building your empire, this $5 million that you give them back after you've done this strategy, they're going to ask you to redeploy that again into another deal so you can build momentum as an organization. That's exactly how Ross and I built our company. We always try to return the $5 million that we all invested. And then, of course, that goes right into the next deal and you try to do it again. But the goal again is cash flow. We don't want to sell this because now we have an infinite return on a coupon. We have no investment and we have just reoccurring cash flow coming in each and every month.
So the coolest part is you try to do this in the first few years of ownership. But what's really neat is we own properties now where we've done this strategy two and three times. So we have properties that we've own for 15, 16 years now that we just keep doing this, we just do what we call just take another bite at the apple. So as the value continues to grow, you just keep going back to the bank, to another cash out refi, to another cash out refi, all tax free because this is debt. Don't forget this. This $21 million is debt. When you sell you have a tax obligation. When you do a cash out refi, you're actually using debt to pay off debt and equity or just other debt. So when you just keep doing this, it just continually puts cash in your pocket. So your investors obviously in their ten 15th year are very happy because we just keep harvesting this property and producing the cash. And of course we get all the tax benefits in the form of depreciation and everything else that comes with it.
This is an incredible strategy. For once you actually own a property. But before you buy a property, there's one crucial factor every great real estate deal has income. Watch this video to find out what it is.