4 Powerful Ways Real Estate Can Make You a Millionaire

Estimated read time 5 min read

A team can sometimes accomplish more than an individual group. Cycling teams in the Tour de France, for example, take turns at the front to reduce the wind. Wolves hunt together to kill animals up to 20 times larger than themselves. We all remember ducks fly together, especially those of us from the 1990s.

It’s not just a group of people that can do amazing things, but rather a group of benefits, which when combined can help you reach your financial goals. I’d like to focus on real estate.

I am a real-estate investor and I believe that real-estate is the best investment option on Planet Earth. But just because you purchase real estate does not mean that you will make money.

In the Book on Rental Property Investment I discuss how real estate investing can make you wealthy by capitalizing on what I call “the four wealth-generating benefits of real estate”.

***Hey, you! Yes, you! This week, I’d like to invite you to the BiggerPockets Webinar on The Top 10 Real Estate Investment Mistakes (and How To Avoid Them). We will be discussing some common mistakes that both new and experienced real estate investors make — and how to avoid them. I hope you can make it. Now back to the article! ***

1. Cash flow

Cash flow is what’s left after expenses are paid for a property. If, for example, my rental property generated $2,000 in revenue and my expenses were $1,700 that month, my cash flow was $300.

You may be saying “Three hundred bucks isn’t going to make me millionaire.”

Most likely not. Remember, we’re only talking about one wealth generator. Three more are left!

This $300 may come from just one rental property. If I owned 10 similar units, with the same cashflow, that would be $3,000 per monthly. If I owned 100 similar units, then that would be $30,000 per monthly. This cash flow could help you quit your current job, save up for a big purchase in the future or retire richer.

2. Appreciation

When I say that I appreciate you, I don’t mean how much I love you. (Though I do!). I’m talking about the natural increase in real estate value. If you bought a property ten years ago for $200,000 and it is now worth $300,000. The appreciation has made you $100,000 wealthier!

Obviously, values don’t increase every year. (Remember 2007!) Real estate values have historically appreciated over time. Appreciation alone will not make you rich, so I do not recommend people to buy bad deals in the hope that appreciation will bail them out.

When appreciation is combined together with other “members” in the wealth-generation team, amazing things can happen.

3. Paying down the loan

You make a monthly payment to your lender when you buy a rental property using a mortgage. This payment is made up of two components: principal and interest. The principal, on the other hand, is the money that you use to pay down the loan.

If you bought a home five years ago at $100,000, and got a $80,000 loan (let’s say that it was a 30 year mortgage with a fixed rate of 5 percent), you would only owe $74,000 today. In ten years, you will owe $65,000. As long as your equity (the difference between the value of a home and the amount owed) increased, you would gain value every year.

If you bought a property in cash and did not obtain a mortgage, you would lose this source of wealth. You are the only one who can make this decision.

4. Tax benefits

The tax incentives that the U.S. Government offers to investors is the fourth source of wealth in real estate. These benefits can be realized at several different stages of the real estate transaction.

As an example:

  • Contrary to most businesses, government does not consider cash flow or appreciation of assets as self-employment earnings; therefore no self-employment taxes are usually due.
  • Depreciation is often used to offset the income tax due.
  • If you decide to sell your rental property, you will be taxed on the capital gains at long-term rates, if any.
  • You can defer taxes by using the 1031 Exchange that is offered by government to help you upgrade your property.

Bottom line: If I make $100,000 per annum from my real estate business, and you earn $100,000 from your job each year, and your mother earns $100,000 from her own business, who would you say keeps the most? You’re right.

You should consult a CPA before making any tax or financial decisions.

An example of putting it all together

Each of these wealth-generating methods can be very powerful on its own. The synergy between the four can make you extremely wealthy.

You could, for example, purchase a $1,000,000 multifamily property with a down payment of $200,000 Assume that this property generates $30,000 in cash flow per year, and it may also increase in value by 5 percent each year. After 10 years, the property could be worth $1.6million and you’d have made another $300,000.

After 10 years of paying down the initial property, you could owe as little as $650,000. This would give you a net worth of $1 million on just that property.

To top it off, you would be able to keep a much larger portion of your profit if you had earned it in another way.

The four wealth-generating properties of real estate are not the only ways to become rich in today’s world, but they make it easy to understand.

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