In a recent discussion with some investors, I asked, “If you guys could write the perfect investment opportunity, like wave a magic wand and poof, that investment exists, what would it be?”
Their answer? “We are looking for something called Infinite Returns.”
Now I’m telling you guys this, because you’re gonna be hearing more and more and more about it.
They went on to explain, that an Infinite Return is they put their money in, they get their money out, but then they continue to get paid.
And I said, “okay, what else do you want?”
Don’t Sell the Asset
“You know, this whole five year up-and-down model,” they replied. “We don’t want you to sell the asset.”
I said, “Why wouldn’t you want us to sell the asset? There’s $50,000 in profit on the asset sale!”
“Because,” they responded, “when you sell the asset, I gotta pay capital gains taxes, which are going up to 40 percent.”
The math pencils out like this:
So out of this $50 grand in profits from the sale, you’re gonna end up getting about $30,000.
They said, “We don’t want the capital gains. We just want the income.”
And by the way, Secured Investment Corp. recently purchased a 22 unit apartment building in Spokane Valley for 2.5 million.
So I presented this challenge to my team and asked, “How can we achieve their desired Infinite Returns with this newly acquired asset?”
So here’s what we did.
We’re buying this asset for 2.5M, but we’re gonna raise 3.4M. And on the 3.4M, we’re gonna give the investors an 8 percent pref with 100% of ownership.
Reno & Rents
In 12 months, we will raise the current rental income of $15,000/month and we’re gonna increase the rental income to $21,000/month because the rents are low.
So if we buy $2.5M at $15,000 in monthly income, we get it to $21,000 in monthly income after we raise the rents and also rehab all of the units. The property will now now appraise at $4 million dollars. So we’ve increased the value by a million and a half by renovating all 22 units and increasing the rent.
The property’s now worth 4 million.
Leverage the Asset’s Value
And then we go down to the bank and we get 60% leverage or debt. Can somebody tell me how much? Let’s look at the numbers when we borrow 60% against the new value of the asset.
How much did the investors invest?
Okay, so now within the first 12 months, We will renovate the units, get the rental income up and attach debt to the property from the bank at let’s call it 5% rate of interest.
Our investors will continue to earn 8% on the one million dollars that still sits in the asset.
But now their ownership goes from 100% to 75%. And we own the remaining 25%
In 36 Months…
Now we hold the asset. Based on the trajectory of the market in 36 months, the property appreciates and we believe it’ll appreciate to about 6 million.
So we go back and we refinance it.
The additional funds are now used to pay off the original loan while providing a return on capital to the investors of 1M. These are how the numbers break down.
We then go to a 50/50 ownership with the investors because they’ve now gotten hundred percent of their capital returned.
We then as a company, hold the asset and continue to share in 50% of the net profit.
Now how much did we as a company put into the deal?
Nothing. And how much do we end up owning? Oh, owning of the asset. 50, 50%.
So we’re buying a deteriorated asset with none of our own cash down, retrofitting it, increasingly rents, and then refinancing.
The magic number here for the refi is 60%. The reason for that is you can get bank lines without personal guarantees.
So we don’t have to personally guarantee any of this debt cuz we’re low below the valuation.
So as a company, we really have Infinite Returns because we don’t put up any cash into the deal.
A Unique Investment Opportunity
Now why do you care?
Because right now nobody’s doing this! And as far as I know, it’s never been done. Everybody always sells it in 60 months. It’s called the “up down.” It’s the waterfall. It’s what everybody else is doing. So as a company, we’re going to pioneer, Infinite Returns to investors.
And I anticipate over the course of the next 12 to 18 months, we’ll do probably 50M-100M of these types of properties right here in the Spokane/Coeur d Alene market.
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