5 Ways to Become a Real Estate Millionaire with Rental Properties

 in Blog / Budget / Invest  tagged real estate

Most millionaires are made from investing in real estate. The reason is due to the 5 ways that rental properties will make you a millionaire. 

As we already know, investing is by far the best way to build wealth. 

Why not invest in an asset that produces cash for you each month while providing someone with a place to live? 

Real estate investing is a win-win. You can run a business providing a clean property for your tenants all while building wealth. 

I myself am a real estate investor and got my start in buying rental properties. They are a fantastic investment and one that will generate massive wealth if you are patient and persistent. 

Just understand, real estate is in no way an outlet to get rich quick. If you sprint without having enough experience or knowledge you can get burned. 

But, becoming a real estate millionaire with rental properties is very possible if you are in it for the long haul. Let me show you why.

1. Cash Flow  

Cash flow is one of the most important ways you can build wealth. It’s the catapult to your real estate growth. 

You Need to Understand How to Run The Numbers 

Just because you buy a piece of real estate does not mean you will make money. You have to understand markets and how to analyze deals. Too many folks have lost money in real estate because they did not take the time to learn how to invest. Focus on analyzing properties before you even begin to buy your first property. 

Please for Pete sake DO NOT follow the following formula: 

Rent – Mortgage = Cashflow 

This is completely wrong and will get you into a lot of trouble. You have to factor in your expenses such as: 

Mortgage 

The amount you must pay to the bank on your loan.

Insurance 

Some real estate investors may tell you that you don’t need insurance. Do not listen to them. It will only hurt you in the long run. Something always happens. 

Taxes 

Taxes are inevitable. You must pay your property taxes no matter where you live. That is why they must be factored in. 

Utilities 

In some situations, you may need to pay utilities. Some small duplexes and triplexes don’t have separate water and electric meters. Meaning the utility burden may fall on you. 

Capital Expenditures 

This is a big one that most people miss. Factoring in for capital expenditures is a must. These are any big repairs such as a new roof, AC, water heater, refrigerator, new plumbing, etc. I just had to re-do the plumbing on a duplex and if I didn’t have this saved I’d be out over $5,000! 

Repairs 

You just factor in for simple repairs. This is maintenance such as leaking faucets, broken light switches, etc. 

Property Management 

If you want this to be a passive endeavor then you need to factor in property management. Even if you plan on managing yourself, you still need to factor this in just in case one day you don’t want to manage your rentals anymore. 

The Real Way to Calculate Cash Flow 

The real way to calculate cash flow is the following: 

Rent – all expenses above = Cashflow 

This will get you an accurate number. How much cashflow should you aim for? 

I like to try and aim for $200/ per door of cashflow. Anything less makes the property difficult to justify the work you need to put in. 

So if I buy a duplex, I want that duplex to produce $400 a month. 

The wonderful thing about cashflow is it usually goes up over time. Houses that rent for $1,000 a month when you first buy them, may rent for $1,800 a month in 30 years. So your cash flow will rise over time. 

2. Appreciation 

Appreciation is how much your property increases in value over time. This is a big factor in building wealth. 

Real estate markets, like the stock market, will rise and fall. 

Sometimes it will really fall, like in 2008 and 2009. 

But over the long term, real estate always rises higher. Here’s a great example. My next-door neighbor night her house in 1990 for $102,000. 30 years later she sold it for $369,000. 

She nearly made 300% on her money. All because she lived in the same house over a long period of time. 

Now imagine if you bought one house per year at the same rate. In 30 years, you would have 30 houses that have provided you with cashflow that has increased over the years, and their value has increased tremendously. 

As the values rise, so does your net worth. 

If you have 10 houses that you paid $100,000 for, and their value increases to 200,000, you are officially a millionaire. 

3 Loan Paydown 

Paying off your loan is a HUGE wealth-building benefit that people don’t think about when investing in rental properties. 

Think about how amazing this is. 

Someone else (your tenant) is getting up every single day and going to work to pay down your loan. They are paying off your debt for you. You just provide them with a wonderful place to live. 

Again, Imagine you but one property a year for 30 years. You will have 30 houses in different loan stages. 

Now you have a snowball effect. Your properties will start to be paid off thanks to your tenants going to work. You can take the extra cash flow from the paid off properties and pay down loans on the other houses.

You are really accelerating your net worth. 

At the same time, Your rental properties are increasing in value. They are appreciating over that time frame. 

And your collecting cash flow from your rentals over the last 30 years. Cash flow has increased significantly. 

To make it simple: Over time your loans are paid down, and your net worth goes up. 

4.) Tax Benefits 

Real Estate comes with massive tax benefits. 

Self Employment Income 

Most businesses have to show appreciation and cash flow as income. Not the real estate investor. The government doesn’t see cash flow or appreciation as self-employment income. So most of the time, self-employment taxes are not due. 

1031 Exchange 

The 1031 exchange is a rule that allows you to sell a property and buy another “like-kind” property without having to pay capital gains taxes.

What I like about the 1031 exchange is you can “beef up” your portfolio if you want to upgrade to bigger properties.

An example would be if you wanted to sell a 4-plex so you can buy a 10-unit apartment building, you wouldn’t have to pay taxes on the sale of that 4-plex. The 1031 exchange allows you to defer those taxes to the larger property. 

Depreciation Benefits 

Income tax is usually tough to get around. In real estate, income tax is usually offset by depreciation. 

Depreciation is when you buy a rental property it usually has some wear and tear, weathering, and so on. You can write this depreciation off on your taxes. 

There are a few things you can’t depreciate like your personal residence, raw land, or a fully depreciated property (27.5 years of ownership). 

You can however depreciate as a real estate investor. The primary rule is that the property must be for an investment or business. Here are the other rules

  1. You must own the property for a year 
  2. The property has wear and tear 
  3. You actually own the property. 

5. Leverage 

I hate debt more than anyone you’ll meet. But, in real estate, leverage is a great wealth builder.

Think about it this way. Someone can buy a $100,000 property for $20,000. Then allow your tenant to pay the other $80,000 over time through their rent. 

Banks are willing to lend us real estate investors money because the loan is backed by a tangible asset (the property). 

You couldn’t do this with stocks in the same way. 

And investors benefit because you get into an asset for 25% down. This is a powerful tool to use in building wealth. 

Now a fair warning. You never want to over-leverage yourself. If you do, you will hit financial ruin. 

Dave Ramsey, the debt-free guy, is a great example of this. He was over leveraged in his 20’s with real estate and a recession hit. When it did, the bank called his loans. He didn’t have the money and went bankrupt. 

Always take on debt with caution. Understanding the ins and outs of your loan before getting into it. 

The Bottom Line 

More millionaires are made from real estate because of these factors. It allows you to build wealth now and later. 

  • Cashflow: wealth you receive now from your properties. 
  • Appreciation: wealth build over time 
  • Loan Pay Down and Leverage: wealth built over time as your tenants pay your mortgage. 
  • Tax Benefits: immediate benefit allowing you to keep more money than a traditional business. 
andrew
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