With real estate investing, it is possible to see your profit soar and become a millionaire. This might sound like a pipe dream, but with the right resources and investment, it is completely doable.
Not everyone who owns real estate is rich, but there are ways to make the most of your investment. In this article, we’ll explain how your property can turn into millions and, ultimately, how to become a real estate millionaire.
1. Cash Flow
Let’s start with cash flow. Cash flow is the surplus profit that remains after a property’s costs have been covered in full. For instance, if your rental property brought in $2,000 and your costs totaled $1,700, your cash flow that month would be $300.
You may think that $300 won’t turn you into a millionaire, and you’re right. But keep in mind that we are only discussing one of the sources of wealth.
Furthermore, that $300 might only come from one property. With the same cash flow, ten such properties would bring in $3,000 a month if you owned them. If you owned 100 units, your monthly income would be $30,000.
All of this profit adds up when you start expanding your real estate investment portfolio and could put you on track to quitting your job and saving for the future.
Real estate naturally increases in value over time, which is referred to as appreciation. For instance, if you paid $200,000 for a home ten years ago, and it is now worth $300,000, the appreciation has made you $100,000 richer!
Obviously, appreciation does not result in values rising annually, but traditionally, real estate prices have increased over the long haul.
We don’t advise people to buy lousy bargains in the hopes that appreciation will save them, because appreciation is unlikely to make you a millionaire on its own.
However, when the other members of the wealth generation team are united with appreciation, amazing things can happen.
3. Loan Pay-Down
When you use a mortgage to buy a rental property, you make a payment to the lender every month. Principal and interest are both included in that payment.
The money you use to pay down the loan is called “principal,” whereas interest represents the lender’s profit.
For example, if you bought a home for $100,000 five years ago and took out an $80,000 mortgage (let’s say it was a 30-year mortgage with a fixed rate of 5%), you would owe $74,000 now, but in ten years you would owe only $65,000.
As long as the value of the property didn’t decrease, this meant that every year your equity, which is the difference between what a property is worth and what is owed on it, would increase, and you would gain value.
Of course, you would lose this source of money if you bought a property outright and didn’t need a loan. You are the only one who can decide if doing this is in your best interest.
4. Tax Benefits
The tax advantages that the American government provides to investors are the fourth wealth-creating factor in real estate. Numerous and obtained throughout various stages of the real estate process, there are many advantages:
- Contrary to most businesses, the government does not consider cash flow or appreciation to be self-employment income, thus there is often no need to pay self-employment tax.
- Depreciation is a deduction that frequently completely offsets the amount of income tax that is owed.
- Additionally, if any taxes are applied to the profit from the sale of rental properties, they are applied at the long-term capital gains rate.
- Using a 1031 exchange, which the government offers as a mechanism to trade up into bigger or better properties, you can frequently postpone paying any taxes.
The bottom line is that the tax benefits are extremely advantageous, and investing in real estate allows you to keep more of your gross income.
Creating Synergy To Become A Real Estate Millionaire
Each of these wealth-creating methods can be effective on its own, as we’ve already mentioned. The synergy between the four, though, can make you extraordinarily wealthy if you combine them.
For instance, a $200,000 down payment could be used to buy multifamily real estate worth $1,000,000. Assume that this property had a cash flow of $30,000 per year and that its value may be rising at a rate of 5% annually.
This implies that it might be worth $1.6 million after 10 years, and you would have made an additional $300,000 in cash flow.
Additionally, after ten years, the initial property can be paid off to the point where you owe only $650,000, giving you a $1 million net value on that single asset.
And to top it all off, you would be able to keep a lot more of those earnings thanks to tax advantages throughout that time period than if you had earned them through any other means.
How To Speed Up The Process
You might be wondering if there is a way to speed up the money-making process. Well, there are techniques that veteran real estate investors use to grow their wealth more quickly.
Get A Better Deal
The power of negotiation can really work to your advantage. If you have great people skills, you might be able to negotiate a better deal on the real estate you’re interested in.
If you buy more property, then it makes sense that your cash flow will be higher. Of course, this is an ideal world where you can afford to do so, and no other factors are affecting your property. However, with a bit of tact, buying more can be very beneficial.
Buy In Appreciating Areas
Doing your research on neighborhoods can really help you make money quicker; you’re more likely to see a bigger profit if you buy in appreciating areas, so be sure to do your homework.
You can upgrade your property to bigger and better deals every few years to maximize your returns. Trading up is probably one of the fastest ways to achieve significant wealth and cash flow through real estate investing.
By investing in run-down properties, you can get a cheaper deal and increase the value yourself. For example, if you buy a fixer-upper for $150,000 and spend $30,000 improving it, you could see the value increase to around $275,000 depending on the quality of the work.
How To Become A Real Estate Millionaire – Frequently Asked Questions
How Long Does It Take To See Returns On Investment Property?
Before you can calculate your ROI, you need to see your first year of profit. Once you’ve seen this, you’ll be able to figure out your return percentage by dividing your annual profit by your total investment.
There’s a lot to consider before investing in real estate, but while it’s not the only way you can get rich, it’s definitely one of the most efficient ways to do so.
Combining the four wealth generators of real estate could see you become a real estate millionaire, especially if you do your research and play the market well, using both the pros and cons of real estate to your advantage.
Paul Martinez is the founder of BendingDestiny.com. He is an expert in the areas of finance, real estate, and eCommerce.
Join him on BendingDestiny.com to learn how to improve your financial life and excel in these areas. Before starting this blog, Paul built from scratch and managed two multi-million dollar companies. One in the real estate sector and one in the eCommerce sector.