January 26, 2023

JF3066: Infinite Returns & How to Create Generational Wealth | Passive Investor Tips ft. Travis Watts

Passive Investor Tips is a weekly series hosted by full-time passive investor and Best Ever Show host, Travis Watts. In each bite-sized episode, Travis breaks down passive investor topics, simplifying the philosophy and mindset while providing tactical, valuable information on how to be a passive investor.

In this episode, Travis explains what it means to achieve an infinite return and how you can do so in both real estate and the stock market.


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Travis Watts: Welcome back, Best Ever listeners, to another episode of Passive Investor Tips. I'm your host, Travis Watts. In today's episode we're talking about a really exciting topic, something I'm truly passionate about, and it's infinite returns and how you can create generational wealth, with the disclaimers - as always, not financial advice, not telling you or anyone else what to do; please seek licensed advice when it comes to your own investing.

Today's topic is certainly a level three in the sophistication of investing. And I'll break down what I mean by that. So a level one to me in terms of investing is to learn how to just buy low, and sell high. And level two would be learning how to generate passive income and cash flow. And level three, what we're talking about today is essentially how to make money for free, and how to achieve what I refer to as an infinite return.

A couple clarification points before we get rockin and rollin into this episode is, number one, again, not financial advice. Number two, not a get-rich-quick kind of scheme. Number three, this is mostly a real estate-related strategy, but you can apply this to other assets, and I'll share some highlights with you later in the episode.

Okay, so diving right in - how can you achieve an infinite return? So let's use the example of buying a single family home. Let's say I take $100,000. That becomes my downpayment, and I turn that into a rental property; then I invest an additional $50,000, let's say, into renovating the unit to make it nicer, newer, better, and to be able to charge more in terms of rent.

So I have $150,000, at this point invested in this home. Let's say I rent it out for a solid year, and I collect a net amount of $25,000 in cash flow. So that'd be about a 16.6% cash on cash return, because $25,000 collected off an investment of $150,000 is 16.6. But this is where it really gets cool. This is the magic of the infinite return strategy.

So let's suppose at this point, after renting it for one year, I can go back to the bank, and I can refinance the property; let's say - we're gonna have to assume here - that the market wherever I bought this property has appreciated in value over the course of the year, and it's worth more in general because of the renovation scope that I did on the property. So I go back to the bank and say "I want a new loan", or "I want to do a cash-out refinance", and let's suppose I was able to extract $125,000 out of the deal, without having a sale. So this would be a non taxable event. I'm just replacing one loan for another, and I'm keeping the property. So if we run the math, I just got $125,000 returned to me, and $25,000 through cash flow from a renter; that effectively put my total investment of $150,000 that I started with back into my pocket.

So what do I do from here? Well, what I would do, and what I have done in the past, is I'll take that money and go do a second deal, while keeping the original deal. And what I just did is create effectively an infinite return. And the reason it's infinite is because you can't put a percentage or an ROI, return on investment, on something where you have $0 in the deal. So every dollar of cash flow that's coming from that first property now is an infinite return.

So I also think about it in terms of a risk-reduction strategy. So I look at it like this - if I've moved on now, and I'm doing my second project, and still holding the first with no money in the deal, what is my risk on that particular investment? What if it burned to the ground, and I had no insurance whatsoever - I see it as a risk-free investment at this point, because I don't have money in the deal. I would just chalk it up to a loss, sell it for the land value, get out from under it and move on, because I still have my original 150k now relocated into another deal.

I also use this strategy when investing in real estate private placements or syndications. Let's say I partner up with an operator, a firm, a general partner, whatever you want to call them. I invest $100,000, and they start a value-add business plan, they get 2, 3, 4 years down the road, they've done a refinance or two at this point, they've extracted as much capital back as reasonably possible and sent that to me, and all the while, I've been collecting monthly or quarterly distributions throughout the years. So at the time that I have received $100,000 back in any way, shape or form, that investment has now become an infinite return for as long as we hold the property, and we don't sell it.

And one other side note on that - as I've been collecting the cash flow on a monthly or quarterly basis, I have been reinvesting that into even more assets that produce even more passive income. And that, my friends, is why I am so passionate and why I love cash flow, passive income, interest, dividends, royalties, you name it.

Break: [00:07:13.03]

Travis Watts: Now, let's discuss stocks, and we'll leave the real estate examples to the side. As you know, with stocks, a refinance is not going to be a strategy that you can use. So what I do - and by the way, I don't allocate a whole lot of my portfolio to the public stock market... But I do have some holdings there, and everything that I hold is a monthly dividend payer; a couple, I would say, are quarterly dividend payers. But regardless, I've got about 15 to 30 different positions in different ETFs and stocks and things like that.

So what happens is I log into my brokerage account about once per month, usually at the end of the month, and what I see in there is a new cash position, because all those dividends go into the cash holdings in my particular brokerage account. And from there, I take that cash, and I either start a brand new position and a brand new stock that I want to own, or I reinvest that cash into my pre existing holdings. So the infinite return comes into play when I take that cash, buy a new holding that wasn't there before, without having to use more of my own capital. In other words, I didn't make a transfer from my bank to my brokerage and then start investing using earned income from a job or something else that I was doing. I just simply let my investments that I already made with earned income buy the new position.

So the way I see it, that's like a bonus investment. Again, if it goes to zero and completely bankrupt, what was my risk? The way I see it - it's just my opinion - is I didn't have any risk in that newly created position, because all the money I had put into my brokerage in the first place one time to build those 15 to 30 different positions is my actual capital. And anything else that's being purchased inside of there without putting more money in is just icing on the cake.

And another cool side strategy that I use in the public markets is because of the volatility and the extreme ups and downs - this doesn't always happen, but sometimes I will catch something nearing the bottom of its cycle, and it will rapidly start increasing from there. So when that happens - let's just for simple math say I put $10,000 into a position, and it goes up 20% or 30% in a relatively short timeframe, meaning less than one year. Well, to me, that's extraordinary performance, and not every position I hold is going to do the same.

So I'll usually sell that position, given that it had such a rapid growth in such a short amount of time, and I'll go reinvest it in something that hasn't had that drastic of a movement, or another potential opportunity that I see a bullish future for. And this, my friends, is called the velocity of capital. I dedicated an entire episode to speaking on the velocity of capital. It's episode number five in the Passive Investor Tips playlist, or it's JF2900 if you want to go listen to the audio podcast. And I suggest you do, because that's another fantastic concept to understand as a passive investor.

So with all of this, I hope you've found some value in this short episode here on Passive Investor Tips. I'm your host, Travis Watts. Always happy to be a resource for you, or feel free to share these episodes with anyone you think could find value. If we haven't connected online, let's do it. Bigger Pockets, LinkedIn, Instagram, Facebook, you do you, use the method that works best. Have a best ever week, and we'll see you on the next episode.

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