Hello I'm Ryan and this is onproperty.
Yeah Hi5 You hear investors talking about how they
got an infinite return on investment.
Today I'm going to talk about how you can get an infinite return on property investment.
Hey I'm Ryan from onproperty.com.au your daily dose of property education and inspiration.
What is an infinite return and how can we get it.
Today I'm answering your question, and today's question comes from Daniel.
He says, "I recently watched a YouTube video from Robert Kiyosaki from Rich Dad Poor Dad
called "Infinite Return" it leaves a lot of info out such as gross rental income, what
kind of loan interest only or other.
Can you comment on this strategy of real estate investing and whether you think they ever
intend to pay off this property or not.
Would they have the option of replicating the strategy on another project and using
the dividends from that to pay off the original project?
Based on Ken McElroy's book he doesn't put his own money into the deals instead uses
investors.
How then does he make his money?
Is it by taking on the management of the property or commission or by part ownership?
Is the interest rate on the deals like this typically higher than a home loan and how
much do you think they typically pay?
Not sure if you can answer these questions since a lot of figures have been left out
but your input would be appreciated."
Then he left the link to the video below, which I will put on the blog for this video
which will be episode 226.
So you go to onproperty.com.au/226.
You can see that Robert Kiyosaki video there and you can see the full transcription and
everything over there as well.
Alright Daniel let's first explain what I think Robert Kiyosaki means when he says an
infinite return on investment because really I don't think in this world there is such
a thing in what I think we're thinking about in terms of infinite return in terms of gaining
infinite amounts of money.
That's not what Robert's talking about.
He's not talking about infinite amounts of money and being infinitely rich, what he's
talking about is the fact that if you put zero dollars into a deal and all you use is
other people's money effectively your cash on cash return will be infinite.
The reason this happens is in order to generate a cash on cash return what we do is we get
the annual income or the annual profit that is derived from an investment and we divide
that by the amount of money that we put into the investment.
so let's say we get a $1,000 back from the investment and we've invested $20,000 into
it.
What we would do is 1,000 divided by 20,000 which is going to give us 0.05 of 5%.
However if you haven't invested any of your own money into a property and it's generating
$1,000 what you're going to do is take $1,000 and divide it by 0.
Now in mathematics anything divided by 0 actually equals infinity and so this is how we the
idea of n infinite return.
A really simple example of an infinite return is when you take an equity loan from another
property you have, maybe your principal place of residence or an investment property.
So you get an equity loan and you draw out that equity which is effectively creating
another loan so you're borrowing that money from the bank, use that equity as a deposit
on the new property and you get a loan for the remainder of that property.
Effectively you haven't gone into your bank account and shelled out any money, you haven't
had to go to work in order to generate a certain amount of money and save that to buy that
property.
You borrowed money from the bank using your house's security and you borrowed the rest
using the new property as security.
So effectively you have $0 invested in the deal.
This would be an example of an infinite return deal if you didn't then put any other money
into the property for example if it was negatively geared.
So this is what he's talking about when it comes to infinite return.
So the way to achieve an infinite return would really be to use other people's money and
that would either be through the banks like getting an equity loan or getting 100% loan
which is really only available with guarantor loans so you could do that or you could invest
in other people and they put up the money and you put up the knowledge and expertise
or the sweat equity.
Talking about Ken McElroy and the way that he does property from my knowledge is that
he actually gains a stake in the properties that he invests in.
He uses sweat equity and his expertise in order to generate deals, so he would go and
investigate a property, do all the due diligence, make an offer, get it accepted and then he
would go out to different investors and he will source funding for that property.
Now I wrote in an email to Daniel I don't know exactly how he structures things and
how much ownership he gets and if 100% is the way he does it but this is what I'm assuming.
He would get, let's say he gets 10 investors and that each invests 10% of the price of
that property.
They might invest 10% but only get a 9% share in the ownership of that property and so what
that does is leave 10% left over for Ken at the end of the day.
Now these investors probably aren't too considered about losing that 1% cause what they're focused
on is the return on investment on their money rather than their percentage ownership in
a property.
They don't care if they own 100% of the property that's a dud or 9% of the property if it's
going to be a killer; what they want to know is how much cash are they investing and what
returns they're going to get for the cash that they're investing and so he may also
make money on commissions and fees for managing the property as well that could be something
on the side.
I do think he would take ownership in it.
From what I would imagine that would be where the big bucks were.
When talking about interest rates on deals and stuff like that, getting an equity loan
and then using that to purchase property is very common in Australia, so it's highly unlikely
that you are going to see inflated interest rates in that example if you go and purchase
property owner finance which is another way to potentially get an infinite return because
owner finance sometimes can be more flexible and you can avoid putting down a deposit.
If you can avoid that deposit owner finance deals tend to have higher interest rates that
come with them.
So I think that answers all of your questions Daniel and really covers the concept of an
infinite return.
It's not infinite in the fact that its making infinite amount of money and they haven't
covered the gross rental yield is and that sort of stuff cause it doesn't matter.
If you make $1 on a property you've invested nothing into it that's an infinite return.
If you make $10,000,000 on a property and you've invested nothing into it, it's an infinite
return as well.
So using the term infinite return doesn't actually tell you whether something is a good
investment and worth your time or not because if you've invested a year of your life and
the property makes $1 even if you've invested no money of your own into it, is it really
worth all that work for a dollar.
Well probably not, even though you got an infinite return and it sounds great it doesn't
necessarily mean its a great investment in terms of the time you've put into it.
So infinite return is something that we can say because it's fun to talk about, it's fun
to talk about playing with someone else's money and getting a return on an investment
with someone else's money and never having to have money ourselves.
But it's not a real indicator whether or not you should invest in a property or whether
or not that particular investment strategy is going to work.
Alright so I hope that's been helpful and if anyone else out there have any other questions
please email me ryan@onproperty.com.au or got to onproperty.com.au/contact and you can
fill in the form there.
If you want my free list of 10 real positive cash flow properties so you can see that they
do exist, they are real, these are properties in Australia not in another country go to
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to that free report.
So until tomorrow remember to stay positive.