Landlording & Rental Properties

4 Powerful Ways Real Estate Can Make You a Millionaire

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Sometimes a team can accomplish far more than a group of lone individuals. For example, cyclists in the Tour de France take turns riding at the front of their group, decreasing the wind for those behind them. Wolves hunt in packs to take down animals 20 times their size. And for those of us who were children of the ’90s, we all remember Ducks Fly Together.

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This brings up another team that can accomplish amazing things — not a team of people, but a team of benefits which, when combined, can help you achieve your greatest financial goals. Specifically, I want to talk about real estate.

I’m a real estate investor, and I firmly believe that real estate is the best traditional investment on Planet Earth today. However, just because you buy a piece of real estate doesn’t mean you’re going to make money.

As I explain in The Book on Rental Property Investing, big wealth is built through real estate investing by capitalizing on something I call “the four wealth generators of real estate.” Alone, each of these benefits can help you make more money, but together they’ll make you rich.

***Hey, you! Yes, you! I want to invite you to this week’s BiggerPockets Webinar, The Top 10 Mistakes Real Estate Investors Make (and How to Avoid Them). We’ll be talking about some common mistakes made by both new and experienced investors — and how you can beat the odds and avoid them! Hope you can make it! And now back to the post!***

evaluate-property

1. Cash flow

Cash flow is the extra profit left over after all of the expenses have been paid on a property. For example, if my rental property produced $2,000 in income and my expenses came to $1,700, my cash flow would be $300 that month.

Related: One Simple Habit the Vast Majority of Wealthy People Practice Every Single Day

Now, I know a lot of you are saying, “Three hundred dollars is not going to make me a millionaire.”

Probably not. But remember, we are just talking about one of the wealth generators. There are still three more to go!

Additionally, that $300 might be from just one property. If I owned ten similar units with the same cash flow, that’s $3,000 per month. If I owned 100 units, that’s $30,000 per month. This cash flow can go a long way toward helping you quit your job — or helping you save for a future big purchase, or retire wealthier.

2. Appreciation

When I talk about appreciation, I am not referring to how much I like you (though I do appreciate you!). I’m referring to the natural rise in value that real estate experiences. For example, if you purchased a property for $200,000 ten years ago, and today that property is worth $300,000, the appreciation made you $100,000 richer!

Of course, appreciation doesn’t cause values to increase every year (consider 2007!). However, historically, real estate prices have appreciated over the long term. So, again, appreciation alone is not likely going to make you a millionaire, which is why I don’t recommend that people purchase bad deals hoping that appreciation bails of them out.

However, appreciation is combined with the other “members” of the wealth generation team, powerful stuff can happen.

3. The loan pay-down

When you purchase a rental property with a mortgage, each month you make a payment to the lender. That payment includes two parts: principal and interest. Interest is the profit for the lender, but the principal is money you are paying down the loan with.

For example, if you purchased a house five years ago for $100,000 and obtained a $80,000 mortgage (we’ll say it was a 30-year mortgage with a 5 percent fixed rate), today you would owe only $74,000. Ten years from now, you would owe only $65,000. This means that every year your equity increased (equity is the difference between what a property is worth and what is owed on it), you’d gain value, as long as the property value didn’t drop.

Of course, if you paid all-cash for a property and didn't obtain a loan, you would forfeit this wealth generator. This is something only you can decide.

workday-productivity

4. Tax benefits

Finally, the fourth wealth generator in real estate is the tax benefits the U.S. government gives to investors. These benefits are numerous and realized in several distinct parts of the real estate process.

For example:

  • Unlike most businesses, the government doesn’t look at cash flow or appreciation as self-employment income; thus no self-employment tax is typically due.
  • The income tax that is due is often offset entirely by a deduction known as depreciation.
  • Additionally, when you sell rental properties, the profit is taxed at the long-term capital gains rate, if at all.
  • You can often defer any tax using a 1031 exchange offered by the government as a way to trade up into bigger or better properties.

The bottom line: If you make $100,000 per year from your job, your mom earns $100,000 per year from a business she owns and I earn $100,000 per year from real estate, who do you think keeps more? That’s right, I do.

Related: The Ultimate Guide to Real Estate Investment Tax Benefits

Of course, I’m not a CPA, so you should definitely consult with one before making any financial or tax decisions.

Putting it all together: an example

As I mentioned, each of these wealth generators can be powerful in itself. However, putting the four together can make you exceedingly wealthy because of the synergy among them.

For example, you might purchase $1,000,000 worth of multifamily real estate with a $200,000 down payment. Let’s assume this property produced $30,000 per year in cash flow, but it also might be increasing in value at 5 percent per year. This means that after 10 years, it could be worth $1.6 million, and you would have earned another $300,000 in cash flow.

On top of that, after those 10 years, that initial property could be paid down so that you owe only $650,000, giving you $1 million in net worth on that one property alone.

And to top it all off, the tax benefits during that decade would help you keep far more of that profit than had you earned it any other way.

Real estate is not the only way to get rich today, but it certainly is a simple one to understand, thanks to the four wealth generators of real estate.

Now that’s a team I want to be a part of.

[This post originally appeared on Entrepreneur.com.]

Investors: What real estate benefits do you LOVE?

Leave your comments below!

Brandon Turner is an active real estate investor, entrepreneur, writer, and co-host of the BiggerPockets Podcast. He is a nationally recognized leader in the real estate education space and has tau...
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    Randy E.
    Replied about 4 years ago
    I know the neophyte real estate investor is reading this as theory, not as a practical means of building wealth. However, these four wealth-generating elements are extremely powerful. I’ve enjoyed the benefits of passive income for many years. My only regret is not starting earlier!!
    Brandon Turner Investor from Maui, HI
    Replied about 4 years ago
    Hey Randy, thanks for the comment! Yeah, people tend to only think of one of the four of these, because 3 of them are more “subtle.” Cash flow is easy to see, the rest- tend to get hidden. But the rest are what turns people into millionaires!
    Danny Szczotka from Salt Lake City, Utah
    Replied about 4 years ago
    “Of course, if you paid all-cash for a property and didn’t obtain a loan, you would forfeit this wealth generator. This is something only you can decide.” Of course if you go this direction, you will have significantly increased cash flow! Leading to higher wealth generation.
    Ryan Kochan from Mary Esther, Florida
    Replied about 4 years ago
    But If you obtain a 100k loan from the bank to purchase a property with 5% interest over 30 years then you’re out of pocket about $5,000 in 30 years. While if you pay all cash upfront then you’re out of pocket 100k and it will take you 30 years to make it back with only cash flow. (Actually slightly less cause of the added 300 per month of profit. But then you’re not turning a profit for 20-25 years.) And the 100k could have been used as down payments for 3-5 other peroperties. Leaving you 900-1500 less cash flow per month. Of course I’m completely new at this real estate thing so please correct me if I’m wrong.
    Randy Evanchyk
    Replied about 4 years ago
    It depends on what lens you are looking through, Ryan. If you are in your 20s or 30s and looking to build a portfolio of rental properties for the purpose of both positive cash flow and general wealth creation, then your logic – and numbers – are perfectly sound. However, if you are in your 50s+ and looking to retire, then more cash flow and less debt – passive income – is the way to go. Actually, not just retire, but being liberated from a 9-5 job requires a certain amount of cash flow. This conversation generally opens the door to a myriad of considerations associated with building a real estate portfolio, but I’m on the Northside of 55, which requires me to look at this from a different perspective. I’ve also spent 25-years building a real estate portfolio, which allows me to live a certain lifestyle. Taking care of my family and living an unencumbered lifestyle sounds pretty good to me, how about you?
    Ryan Kochan from Mary Esther, Florida
    Replied about 4 years ago
    Okay yes I see where you’re coming from. I am 18 so I am definitely looking towards the general wealth creation so I’d be going for the loans
    Randy E.
    Replied about 4 years ago
    I suppose it depends on you age and stage in life, but I agree w/Danny. I’m enjoying the benefits that higher equity — mainly increased cash flow — delivers.
    John Thedford
    Replied about 4 years ago
    Another good article especially for those considering life’s alternatives. Thanks..I will pass it on.
    Caleb Mills Investor from Euless, Texas
    Replied about 4 years ago
    Ryan, You would be out a lot more than 5k in interest over thirty years. The 5% is an annual interest rate that is adjusted monthly based on the Loan(Principal) amount. So you would be out 5% of the loan amount each year. It’s more complicated, because you are paying down the principle each month, but the total interest you would end up paying would be $93,171.54. If you had a 30 year mortgage at 100K and 5% then your monthly payment would be approximately $537 per month. Monthly interest is calculated as follows (Loan Balance * 5%)/12months.
    Ryan Kochan from Mary Esther, Florida
    Replied about 4 years ago
    Ah. Yes you are right. I suppose I should learn how mortgages work lol.
    Donald Rohrbaugh Professional from Youngstown, Ohio
    Replied about 4 years ago
    Great article Brandon!
    Lonnie Williams Investor from Louisville, Kentucky
    Replied about 4 years ago
    Great article very simplicity but informative. Thanks, I will follow-up with the blog post for sure.
    Peter Mckernan Residential Real Estate Agent from Newport Beach, California
    Replied about 4 years ago
    Hey Brandon, Great article. I believe by far the best situation and wealth create that comes along with taxes is the 1031 exchange model of investing! It is a easy way to grow wealth and keeping moving up without getting taxed heavily! Thank you for the article!
    Kurt Ehlers New to Real Estate from Pittsburgh, PA
    Replied almost 4 years ago
    Hey Brandon thanks for the great article! Are the tax benefits different depending on if property is under your name or under an LLC or another form of business?
    Louis Chrispin from Melrose, Massachusetts
    Replied about 3 years ago
    I am so new to this way of thinking, but please guys help me any way you can. this stuff is legend.
    Alvaro Os
    Replied about 1 month ago
    Hi, I've been investigating all that I can about cash flow or generate one or more income for them invest it in something and then recuperate and buy more. I was reading about rich dad poor dad. How to make a webpage. and right now im investigating about amazon FBA. Some recomendations about some tips? I like to know the opinions of all the people that only one.