Ninety percent of all millionaires made their money through property investing. The real estate industry has made more money for investors than all industrial investments put together.
But how did these millionaires make their money? Can anyone do it? And how easy is it?
Actually, it could be easier than you think.
You’ve seen the advertisements for property seminars and the books proclaiming how to become a millionaire. Here’s a simplistic model that could make you a property millionaire within a decade.
How to Become a Millionaire
The Real Estate Billionaires
Real estate investment is one of the safest and fastest ways to make money and grow your net worth.
Since 2015, more and more US-based self-made real estate billionaires are on the annual Forbes Billionaires List. This speaks volumes about the progress and focus of wealth across geographies and industries in the US.
Jay Paul (#1,250), a San Francisco-based developer, benefited from the boom in property values and leasing to companies like Amazon and Google. Sanford Diller (#1,415) develops and manages high-end residential and commercial properties on the West Coast.
Both investors succeeded because of economic growth and wisely chose to invest in hotspot areas, but this strategy can be copied to any local area. Here’s how it can be done.
How to Become a Millionaire from Real Estate in 8 Years
Step 1 – Save $35,000
Step 2 – Buy a $600,000 duplex with 5% down at 2.49% interest over 25 year term = $2,500 per month mortgage.
Step 3 – Rent each unit for $1,750 per month = $3,500 passive income per month income.
Step 4 – Allow $500 each month for expenses.
Step 5 – Assuming appreciation is 6% per year, after 3 years, re-finance and pull $100,000 equity.
Step 6 – Buy two more units worth $500,000 with 10% down.
Step 7 – After three more years, repeat, and buy 1 more duplex at $500,000 with 20% down.
Year 8 – Equity = $1,121,000
Duplex 1 $459,000
Duplex 2 $478,000
Duplex 3 $478,000
Duplex 4 $184,000
Of course, this model is simplistic and doesn’t take into account specific risk factors, but the terms below break down each important step.
Passive cash is one of the easiest ways that millionaires grow their capital. Real estate isn’t an easy option. What we mean is that earning money is limited to the number of hours in a day that someone can work. Receiving rent even while you’re asleep or on vacation creates passive streams that aren’t related to your limited time.
The most common fixed expenses (other than mortgage payments) for rental property include:
- Property management fees
- HOA fees
- Property taxes
- Trash collection
Not all apply in full as they can be paid by the tenant, depending on the property. If you’re looking to invest in real estate, put together a P&L sheet and include them all, so you have a good idea of all expenses, and so they’re not overlooked.
Other variable expenses include:
- Day to day repairs for normal wear and tear
- Improvements such as a new roof/ heating system
- Landscaping/ snow removal /etc.
- Vacancy expenses for turning the property between tenants
- Leasing management fees for finding a new tenant
Research or speak to other investors to get an idea of costs over a year and set aside enough each month in an accessible but separate account.
Real estate can and does lose value, but typically investors are in it for the long term because the value of a property will (usually) inevitably go up. Growth in the market forces appreciation, but it can also be made by buying and restoring run-down properties.
If your property has enough equity, you can put in a new mortgage on a property and cash-out some of the appreciation or equity gained. This non-taxable event means the money withdrawn is tax-free, and 100% can be used to purchase more investment properties and grow wealth. This critical step could be the difference between having a good investment property and earning millions.
Real estate owners can build equity in two key ways: reducing the amount of property loans and increased property value. The more money that is made on the property, and which isn’t being used for expenses, can be used to reduce the mortgage.
As the loan is being repaid, debts are reduced, and equity increases, meaning a higher net worth.
Many people aren’t aware that there are multiple tax benefits to owning property, which can leave real estate investors paying fewer taxes overall. The government encourages property investors, and so benefits include no self-employment tax on rental income, property tax and mortgage deductions, and more. Therefore, property millionaires not only make money but get to keep a lot more of the money they earn.
Perhaps, the secret to making a million dollars in real estate is that there is no secret. Greater wealth can be achieved, and certainly within a reasonable time, enough to retire early and reap the benefits.
Are you a property millionaire, or do you know how to become a millionaire another way? Let us know in the comments section below.