What are the Infinite ROI opportunities?
Free property – is it possible?
We all know that buying real estate requires money. Technically there ‘no money down’ deals do not exist. Infinite ROI (Return on Investment) is when you have zero of your own money in the property you own.
When you purchase a property you traditionally need to bring 20% down. Often, smart renovation can force the value of the property up by a significant amount. Two-unit, three-unit property conversions are examples of increasing the value of the property by substantially more than the cost of renovation.
Step 1 – Purchase
If you manage to put down less than 20% down-payment, your goal of getting infinite ROI becomes a little easier. For example, sometimes the seller of a property will be willing to offer VTB financing (Vendor Take Back), which is a small loan provided by the seller and secured by the property you bought from them. Combined with the bank’s financing, you may be required to put down less money, but this is rare.
Step 2 – Renovate / Build Second Suite
The next step is to complete renovations and build an additional new unit. The process may take 8 to 10 weeks. You will need to get an experienced team and apply for building permits. It is important that the property is properly located and zoned to allow the building of additional suites. The city will provide you with a building inspector to make sure everything is built to code, with electrical inspections done by another inspector. In the end, you will receive an occupancy permit, and newly constructed units can now be advertised and rented out.
Step 3 – Refinance
Once you have turned the property into a legal duplex and rented it out, you can now refinance. Refinancing is the process of getting a new mortgage and paying off the old one now that there is additional equity in the property. The bank will appraise the property to determine the new value based on the income from two units. When the new mortgage is funded, the original smaller mortgage is paid off, the difference is then paid back to you which will recoup all the renovation costs as well as some of the initial down-payment.
Step 4 – Enjoy Infinite ROI
There are a few variables here which may play in your favor – if the purchase price was a very good deal and well below market and the renovation costs were low, and bank’s appraisal value was high, then you may have a ‘free’ property by the time you refinance. Otherwise, all you need to do is hold on to the property and wait for about three years. There is a great chance the property value will appreciate, allowing you to refinance again pulling out more than what you initially invested. From this point, you will have infinite ROI – you no longer have invested funds and all future gains make your returns infinite.
To illustrate the point, here is the breakdown on numbers:
|a||Property Purchase Price||430,000|
|b||Appraisal, inspection, legal costs||2,900|
|c||Land Transfer Tax||5,075|
|e||Total funds required (including downpayment)||93,975||Initial investment|
|f||Renovations (including carry costs for 3 months)||80,000|
|g||Appraisal, penalties and legal fees||5,000|
|h||Total cost (purchase, closing costs, renos, refi costs)||522,975||(rows a+b+c+f+g)|
|i||New value (after appraisal)||600,000|
|j||New mortgage advanced||480,000|
|k||Remaining invested funds (after 3 months)||42,975||h-j|
Assuming just the minimum 3% of appreciation over the next three years, we can refinance again. See the breakdown illustration below (mortgage 3.5% with 30 years amortization):
|1||Year 1 appreciated value||638,000|
|Year 1 mortgage paydown||9,251|
|Total gained equity after year 1||47,251|
|2||Year 2 appreciated value||657,140|
|Year 2 mortgage paydown||18,830|
|Total gained equity after year 2||75,970|
|3||Year 3 appreciated value||676,854|
|Year 3 mortgage paydown||28,746|
|Total gained equity after year 3||105,600|
If you refinance after Year 3 your new mortgage will be $540,000 and after paying off the original mortgage you will receive back around $83,000! Your property is now ‘free.’ Remember to be careful when making a decision on how much to refinance a property for. It must have cashflow, and if your tenants are paying low rent, you may want to hold off the decision of refinancing until a tenant turnover occurs and you can start renting at current market rents.
|New value (after appraisal)||675,000|
|New mortgage advanced||540,000|
|Old mortgage balance||451,254|
|Appraisal, legal costs to obtain new mortgage||1,700|
|Net funds received||87,046|
|Net finds received – invested funds (from year 1)||44,071|
If this strategy speaks to you, it is advisable to obtain a three-year term mortgage when you refinance that first time after renovations to avoid break penalties.
I have implemented this strategy with my partners in the past — my investors and co-venturers are enjoying infinite ROI and are ready to reinvest initial capital to continue building their wealth. We still own every property together.