Comments on: An Infinite Return On Investment Is Impossible, Even In Real Estate

By: Weekend Link Love And Carnival Roundup - Amateur Asset Allocator

Weekend Link Love And Carnival Roundup - Amateur Asset Allocator — Mon, 13 Jul 2009 03:16:34 +0000

[...] post An Infinite Return Is Impossible, Even In Real Estate was featured as an Editor’s Pick in the Carnival of Personal Finance #212 hosted by Darwins [...]

By: Matt

Matt — Thu, 09 Jul 2009 02:27:48 +0000

An infinite return DOES mean that you get infinite money if you ignore the practical element of the situation. In your arguement you point to the practical when it suits your arguement but fail to notice where it doesn’t.

ROI as a metric in inherently flawed for this type of debate because it assumes linearity across all levels of investment. If instead I said given an investment you got a 10% ROI then you’d expect to get $1 if you invested $10, or $10 if you invested $100. However, even in the real world this doesn’t hold up for ANY investment. If I invest $1 trillion in a particular stock, I will not earn 100 billion because by that point I will either have exceeded the possible number of shares to own, or completely altered the financial situation that the ROI was based upon. On the opposite extreme it is doubtful I’d be allowed to purchase a stock at 1 cent or less…and if I did my 0.1 cent return would probably be rounded away into oblivion.

However, if you took the ideal case of a company with infinite shares, with unlimited growth potential, then I should expect my ROI of 10% to hold up at any level. In the same way, if unlimited real estate was available for no money down, I could conceivably get infinite money.

So yes, the text book ROI is definitely infinite…but does not define real world outcomes, anymore than a 10% ROI says anything about an investment as it approaches bounds of practical extremes.

By: Kyle

Kyle — Wed, 08 Jul 2009 16:38:59 +0000

Paul, thanks for pointing that out. Even if you put zero down, you still definitely need to hold cash in reserve to take care of unexpected expenses, which for all practical purposes is a form of “down payment” anyway. Returns in real estate can be large, but you’ve got to be realistic. Espousing “infinite returns” is irresponsible, in my opinion.

By: Joe

Joe — Wed, 08 Jul 2009 05:54:49 +0000

Nicely written and explained article.

By: Paul

Paul — Wed, 08 Jul 2009 01:10:56 +0000

Obviously, no one can get infinite returns. I’ve done some “no money down” deals and in truth I’ve always had to come up with cash. Investment property requires cash for unexpected expenses. If you don’t have any cash for a down payment, it’s likely that if you lose a tenant for a long period or need a new roof you can be in deep trouble.

Some people seem to think that if they buy property for no money down, that they can walk away if there are problems without any consequences. But if you default on a mortgage, consider your credit score. What is the return for the next seven years when you are paying a premium for any money you try to borrow? Maybe, it’s a negative infinite return

By: Kyle

Kyle — Tue, 07 Jul 2009 23:28:20 +0000

“Pedantic” is just a fancy word for “correct.”

By: Patrick

Patrick — Tue, 07 Jul 2009 19:25:23 +0000

Dang, forgot the other thing I wanted to say…

Your own logic is even more faulty than Kiyosaki’s. You claim that an infinite ROI on a zero investment means that you get all the money in the world and more. However, you can’t claim that zero times an infinite quantity is infinite because it is undefined. I would be just as justified in claiming that zero times an infinite quantity equals five bucks.

By: Patrick

Patrick — Tue, 07 Jul 2009 19:21:06 +0000

You’re being pedantic. For a given profit, the ROI increases without bound as the investment approaches zero. I’d imagine even the most stubborn mathematician would be satisfied with someone using “the ROI is infinite” as an informal shorthand for this.

By: Joe B

Joe B — Tue, 07 Jul 2009 18:17:08 +0000

Dang SJ beat me to the limit.

Kyle,

You bring up an interesting point about the scammers. They claim an infinite return on investment, due to a $0 monetary investment. By that logic going to work has an infinite ROI, since it didn’t cost anything to go to work, except time.

Maybe I should start selling a new infinite ROI program called, “NO MONEY DOWN JOBS!!!”, only 4 easy payments of $69.99

By: SJ

SJ — Tue, 07 Jul 2009 17:42:35 +0000

lim (a-> 0) (5 /a) = infinity, for all intents and purposes.

The obvious problem is you are ignoring the amount of time; and the true cost isn’t 0.