Plan: Build $1M in Net Worth Through Real Estate With 5 Purchases Over 7 Years
The plan I am about to describe is very similar to the one I am taking in my life. The idea is simple: buy incredible rental properties, save the cash flow, and reinvest that cash flow into even more properties. This is not a get-rich-quick plan. It plays out over seven to 10 years—maybe more, maybe less.
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The timeline is not important, nor are the specific numbers. What matters is the underlying math, and I hope that after reading about this plan, you will better understand the kind of plan you will want to build for yourself.
Before I get to the plan for making $1,000,000 in net worth, let me clarify a few things:
- This is not the only way to make money in real estate, just one path that I like.
- This is not a guaranteed plan. This is an “if-then” plan. If A, then B, and if B, then C. Everything depends on those “ifs.”
- This plan works based on ideal numbers. For example, I use a nice, round “3% appreciation” number, because that has been the U.S. historical average. However, real life is not likely going to appreciate by exactly 3% each year. Some years might be 1%, some might be 5%, and others might be -4%. Again, these are average ideals.
- The specific price per unit does not matter as much as the mathematical concepts I’m about to talk about. For example, if I say, “Buy a $100,000 house,” half the readers of this book will instantly think, “Phhhh… I could never find a house that cheap,” while the other half thinks, “Phhhh… I would never pay that much for a house.” Real estate is relative to location, and that’s OK! The mathematical concepts are what matter, far more than the specifics. You might find properties with values that are higher or lower, depending on your location.
- This is not legal advice. I’m not even telling you that this is the path you should definitely take. Again, this is just one plan that has worked!
Setting Your Buying Standards
The vast majority of properties out there are terrible investments and would end up costing you more than you’d make. Instead, you must adhere to certain standards for this plan to work. The following is an example of such standards:
- Multifamily property (In this plan, we'll be buying fourplexes and 24-unit apartments.)
- Cash flows of $200 per unit, per month after all expenses have been paid, including vacancy, maintenance, utilities, management, capital expenditures, taxes, and insurance, plus any other expenses the property may have.
- Property must be purchasable for a discount because you are great at finding great deals in the market. For this sample plan, we’ll be buying each property at 80% of what it’s normally worth. For example, while the average buyer would pay $100,000, we’ll pay $80,000.
- Property’s value must be capable of being improved by 10% during the first year through “forced appreciation” (such as a paint job and landscaping).
- Property must appreciate at 3% per year after year one.
You may be tempted to say that these standards are impossible to fulfill, but trust me, they are not. BiggerPockets is full of examples of investors who are following these very standards and succeeding. Perhaps the area you live in is different, but these locations do exist. I own properties just like this. However, you will have to think differently. For example, ask most average Americans whether buying a property for 80% of its value is possible, and they’ll say, “No.” Ask an experienced house flipper, and he or she will say, “Yes, but that’s paying way too much.” You see, a house flipper or real estate wholesaler typically has to purchase a property for far less than 80% of the value for their plan to work. It all comes down to mindset. Are you someone
who says, “It can’t be done!” or someone who asks “How can it be done?”
Buying Your First Property
Using these standards, we find a fourplex that needs a little help. Perhaps it’s a bank repo that smells like a hundred cats, or a for-sale-by-owner (FSBO)
property owned by someone who can’t quite take care of it. I’m not talking about a disaster—just a place that needs some cosmetic assistance.
The property is listed at $100,000, but we are able to buy it for $80,000.
For simplicity's sake, we'll say that the seller will pay our closing costs, which means we are required to put down $16,000 for a 20% down payment. In addition, we will spend $4,000 on minor repairs and improvements to satisfy the standard of 10% appreciation during the first year.
Here is a summary of our portfolio after year one:
- Our loan is for $63,500 (approximately).
- Our value is at $110,000 (10% appreciation during year one).
- Our cash flow saved (from cash flow) is $10,000. (OK, technically $9,600. I like easy math.)
- Our total equity is $46,500.
- Our total net worth is $56,500.
Now, I just want to quickly remind you that this kind of property doesn’t exist on every street corner. Is finding these properties difficult? Yes! Is find-
ing these properties hard if you only need to find one such property every two years across the entire United States? Well, it’s definitely not impossible!
Nothing changes during year two. During this year, you simply manage your property incredibly effectively. Cut expenses as much as possible; raise the rent as much as possible. Run a well-oiled machine. By the end of year two, our portfolio looks like this:
- Our loan is for $63,000 (approximately).
- Our value is at $113,300 (3% appreciation during year two).
- Our total cash flow saved is $20,000.
- Our total equity is $50,300.
- Our total net worth is $70,300.
At the start of year three, we will buy our second fourplex, using the $20,000 we have saved from the cash flow. (That’s right, we’re not going to put any more of our hard-earned cash into this plan.)
This next property will be exactly like our first—identical, with the same numbers, same price, and same cash flow. (Remember, this is an “ideal” scenario just to represent how this works in the real world. Maybe you’ll buy a fiveplex, a triplex, or four separate houses. The underlying math is what
is important.) We now have two income streams going: Fourplex A and Fourplex B. For the sake of time, here are our combined figures for the end of year three:
- Our combined loans are $126,000.
- Our combined value is $227,000.
- Our annual combined cash flow saved is $20,000.
- Our total equity is $101,000.
- Our total net worth is $121,000.
At the end of year four, we will simply “rinse and repeat” once again. You guessed it—another fourplex, same numbers. We now have three streams of income going: Fourplex A, Fourplex B, and Fourplex C. The totals for the end of year four are as follows:
- Our combined loans are $177,000.
- Our combined value is $350,500.
- Our annual combined cash flow saved is $30,000 ($10,000 from each property).
- Our total equity is $173,500.
- Our total net worth is $203,500.
At the end of year four/the beginning of year five, we will make our first “trade-up.” If you are familiar with the board game Monopoly, you’ll recognize this strategy. In Monopoly terms, we’re essentially going to trade our houses for hotels. In this example, however, we will trade our three fourplexes for one apartment building. As you saw at the end of year four, we have accumulated approximately $203,500 in equity, but we can’t use all of
this cash; the trade-up has certain costs associated with it (such as agent fees and closing costs) that need to be covered.
We will use a 1031 tax exchange to defer taxes to a later date, but we still need to pay closing costs and for an agent to sell the properties. After all expenses have been paid out, we will have approximately $175,000 remaining to invest in our next property. As you can probably guess, we will use this as a 20% down payment on our next investment, allowing us to pay up to $875,000 for a property.
We will buy our new property using the same “standards” as for our first three properties. These were (as a quick reminder):
- Multifamily property.
- Cash flows of $200 per unit, per month after all expenses have been paid.
- Property must be purchasable for 80% of its value.
- Property must be capable of being improved by 10% during the first year through “forced appreciation.”
- Property must appreciate at 3% per year after year one.
After some careful searching, we find an apartment building worth $1,000,000, but we are able to buy it for $800,000. Our 20% down payment ($160,000) makes the loan amount $640,000 and leaves us with approximately $13,000 for closing costs, reserves, and some repairs. At the end of year five, our portfolio looks like this:
- Our loan is for $625,000.
- Our value is $1,100,000 (10% during year one).
- Our cash flow saved is $57,600 (24 units x $200 x 12 months).
- Our total equity is $475,000.
- Our total net worth is $532,600.
No changes or purchases are made during year six. We just relax and collect the cash flow, saving every penny for our next trade-up. Again, this is a time to manage effectively and save cash. At the end of year six, our portfolio looks like this:
- Our loan is $610,000 (approximately).
- Our value is $1,133,000 (3% during year two).
- Our cash flow saved is $115,200 (24 units x $200 x 24 months).
- Our total equity is $523,000.
- Our total net worth is $638,200.
Year seven is another year of rest—if you can call it that! We simply manage effectively and save all the cash we can. At the end of year seven, our portfolio looks like this:
- Our loan is $595,000 (approximately).
- Our value is $1,167,000 (3% growth over the previous year).
- Our cash flow saved is $172,800 (24 units x $200 x 36 months).
- Our total equity in the property is $572,000.
- Our total net worth is $744,800, including the cash flow saved.
Perhaps you want to simply live off the cash flow from this point on. This scenario is generating a respectable $57,000 in passive income each year, which is approximately what the average American household earns.
However, the total net worth is only three-quarters of a million dollars.
One final trade-up would be needed to reach that final million-dollar figure. Perhaps this could happen right away during year seven or perhaps not for several years. The key is to work with the market, to learn to ride it like a wave. For example purposes, let’s sell now and trade up.
End of Year Seven/Start of Year Eight
We take all the equity and cash we have (approximately $744,800) and subtract the sales expenses (we’ll say $94,800) to give us a nice round final profit of $650,000 to use for our final down payment.
Our final purchase will be a 75-unit apartment community listed for sale at $3,400,000, but we are able to purchase it for just $2,750,000 (20% off because the same rules apply!). We’ll use the down payment of $650,000 (making the seller pay closing costs) for a total mortgage amount of $2,100,000. At this final stage of our “million dollar journey”—the end of year seven or the start of year eight—our portfolio looks like this:
- Our loan is $2,100,000.
- Our value is $3,400,000.
- Our cash flow saved is $0 (but will be $15,000 per month going forward).
- Our total equity is $1,300,000.
- Our total net worth is $1,300,000.
We did it! One million dollars ($1.3 million, actually), with only five purchases in seven (maybe eight) full years of investing.
Is This Possible?
Remember, this is an ideal situation with nice, round numbers. Many people have moved much faster, while others have moved much slower in their investment journey. The purpose of this exercise was simply to give you a "big picture" idea of how the approach works and to provide a good illustration of what I call "trading up." This journey could take ten years, or it could take 20. It depends on a number of factors, many of which are outside your control (such as inflation, the market, the economy). However, this represents a possible road map. If this were your road map, it would be much easier to stay on track and avoid the shiny-object syndrome so many of us face! This plan sets standards that, if obtained, would give us the outcome we desire.
What do you think of this plan? How does your own plan match up?
Let’s discuss! Comment below.