I want to share with you a really simple explanation of how a person can go from almost nothing to becoming a millionaire by owning rental properties.
Let’s first get some clarification on how this works. We’re talking about buying rental properties, which means you buy a house—or maybe a duplex or an apartment building—and you rent it out.
But before I walk you through the math behind becoming a millionaire through real estate, I want to get us all on the same page as to the fundamentals of owning rentals.
The 4 Wealth Generators From Rental Properties
First, let’s talk about the four wealth generators. These are the four things that make owning rentals so awesome.
I talk about these way more in-depth in my book, The Book on Rental Property Investing, but let me give you the quick and dirty on the four wealth generators.
1.) Cash Flow
This is the extra money every month that a property produces in profit (income minus expenses). The key to this, though, is making sure you have an accurate understanding of what those expenses are. They can be tricky. But basically, the money you’re left with in your pocket, that’s cash flow.
This is basically the simple truth that real estate tends to climb in value over time. Sure, things like 2008 happen and prices drop—sometimes a lot. But over time, prices do tend to climb.
As long as you can hold onto properties long enough, you should always see appreciation. And that’s why cash flow, which we just talked about a second ago, is so key. As long as I’m making cash flow each and every year, I can hold it as long as I need to—maybe forever.
3.) Loan Paydown
Now normally, when you buy a piece of real estate, you get a loan from a bank, which you pay on each month. But the cool thing is, over time, this loan gets paid down, which means you might start off owing $200,000 on property but eventually you’ll owe nothing.
4.) Tax Benefits
Now, for our purposes, we’re not going to talk a lot about it. But in real life, man, the tax savings are HUGE! Like if you make $100,000 from real estate and your friend made $100,000 from a job or a business they own, you’d likely end up keeping WAY more money than your friend.
How the 4 Wealth Generators Can Make You a Millionaire
Let me show you how these four wealth generators can make you a millionaire.
Let’s just say you bought a house as a rental. Maybe you put down 20 percent or maybe you found a more creative way to finance it and were able to do it with no money down. (This, by the way, is entirely possible. We’ve got a ton of content at BiggerPockets all about that. Heck, I even wrote a book on it!)
But anyway, let’s say you bought a house for $100,000 and put 20 percent down, so your loan is for $80,000. And let’s say you were able to make $200 per month in cash flow from that house.
$200 x 12 = $2,400 per year
So after one year, you’ve made $2,400. But there’s more to that, isn’t there?
During that time, your loan balance dropped from owing $80,000 to like $78,500. But assuming a 3 percent average appreciation, the value of the property has climbed to $103,000. So in reality, you made $2,400 in cash flow, but you also made $1,500 in the loan paydown and $3,000 in appreciation. We’ll ignore the tax benefits for now, but they make this even better.
So you’ve actually added about $6,900 to your net worth during the first year. You’re not a millionaire yet, but over time, the cool thing is, this speeds up.
You start paying off more and more of the loan, and the value goes up and up. In fact, assuming a 3 percent appreciation, after 10 years, the property might be worth around $135,000 and you should only owe around $60,000.
The difference between what you owe and what it’s worth is called equity, and with these numbers, it’s around $75,000. If you were to add in the cash flow you were making every month, you’ve actually added about $100,000 to your net worth.
I know a lot of you are thinking, “Ten years and only $100,000? That’ll take me 100 years to reach $1,000,000!”
But here’s the cool thing: This is just ONE deal. Once you’ve figured out how to do one, you can do another. And another. And another.
And you don’t have to stay small with $100,000 houses. In fact, what if you were to buy a $500,000 small apartment complex. The same principle applies here. Every year you’re paying off a little, and every year you’re increasing in value. Your cash flow is increasing, your net worth is increasing, and you’re getting wealthier.
And that’s how you become a millionaire through rental properties! You buy cash-flowing rentals that increase in value over time while also paying the loan down. All the while, your wealth is being built.
FAQs About Investing in Rental Properties
Now, here are a couple concerns you might be having.
1.) How do I come up with all these down payments?
In the beginning, maybe you’ll save up for the down payment. But honestly, I built my portfolio using more creative strategies—things like house hacking, the BRRRR strategy, using partners, or raising private money. Or maybe you’ll fix and flip a house and use that money to invest.
There are a lot of ways to put together a deal. But the bottom line is, if you have a good deal, you’ll figure out a way to finance it.
2.) How do you know if you have a good deal?
You’ve got to learn how to analyze ’em! We have calculators at BiggerPockets.com that you can use, and I also teach a free webinar every week on BiggerPockets, where I walk people through the numbers. Sign up for my next one at BiggerPockets.com/webinar.
3.) How do you manage all these?
Well, the short answer is you don’t. I mean, you could, but for most of my properties, I hire a property manager to look after them. Of course, you still have to manage your manager, but they are the ones getting the phone calls from tenants.
4) What if the market drops?
This is why I buy cash-flowing rental properties. If the market drops, OK—I’ll just keep holding onto them. And I’ll buy more properties because now everything is on sale.
The Bottom Line
You know what? You CAN become a millionaire through real estate. I did it in under a decade!
Sure, it won’t happen overnight. But it will happen if you’re patient, you stick to sound principles, and you continually educate yourself on how to be better.
Have you begun your journey toward becoming a millionaire yet? If not, why?
Leave a comment below!
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.