Which strategy builds massive wealth the fastest?

47 Replies

I have either read on the forum or heard in the podcast that you choose your strategy based on your goal(s). I.e. Rentals create passive income and wealth in the long run vs. rehabbing which has large payoffs in a shorter amount of time but doesn't have the tax or appreciation benefits that buy and hold does. My question is which strategy builds massive wealth the fastest? I do not mean a get rich quick thing - for example I figure if you raise enough capital from investors and you keep your living expenses low, you can snowball your returns, with each year being able to flip more and more houses. You also have success stories like Lance Wakefield. And then you have the real estate billionaires which seem to be developers for the most part - so would real estate developing be the answer?
Originally posted by @John De La Garza :
I have either read on the forum or heard in the podcast that you choose your strategy based on your goal(s).

I.e. Rentals create passive income and wealth in the long run vs. rehabbing which has large payoffs in a shorter amount of time but doesn't have the tax or appreciation benefits that buy and hold does.

My question is which strategy builds massive wealth the fastest?

I do not mean a get rich quick thing - for example I figure if you raise enough capital from investors and you keep your living expenses low, you can snowball your returns, with each year being able to flip more and more houses.

You also have success stories like Lance Wakefield.

And then you have the real estate billionaires which seem to be developers for the most part - so would real estate developing be the answer?

 I am absolutely convinced that the best way to build wealth is a combination of the two methods.

After studying what the more experienced investors do to build wealth I saw a pattern.

They buy a property, usually at below appraised or market value. This means that when they close they have already made money.

They do work on the property to increase the property's value. They invest money so that the value increases far beyond the cost of doing the repairs. At this point flippers immediately cash out the gains by selling. This is great if you are trying to build up cash so that you can do bigger deals, but not the best for building long term wealth due to it being more hands on and the fact that you take a larger tax hit.

They look for cash flow. That cash flow covers all expenses and provides them with a return on their investment. They also buy in areas where they will get appreciation. The levels of appreciation will vary depending on location, but the wealthiest investors benefit from appreciation. The wealthier investors hold onto their investments for longer time periods.

They use money made from real estate investing to continue to invest. They use methods such as cash out refinances, HELOCS, and 1031 exchanges to draw out equity and appreciation gains in order to invest in more real estate without facing tax penalties.

@John De La Garza

That's a pretty loaded question. In addition to the excellent comments by @Anthony Gayden, I would add that it depends on the market you're in and your age. I live in the DFW area and am in my 50s. I am investing for income. The properties we buy probably won't see the appreciation some other areas around here will. If I was 30 years old, I'd take less cash flow for the great appreciation I believe we will see here in the coming years.

@John De La Garza One factor you should consider is leverage. From what I've seen, that is the largest determinant of how quickly people are building wealth. 

If you borrow 10 million to develop a property it's not so hard to make 2-3 million.

If you borrow 20 million to purchase commercial property, you'd get some pretty good income.

@Anthony Gayden I like your point about having both as well as appreciation but I do think it has a lot to do with what @Rob Drum mentioned about leverage. @Stan Hill I'm 32, there are so many facets in real estate that I'm just trying to narrow down my focus. I honestly believe that the way to build massive wealth the fastest is by having your own business. Then at that point using earnings to hold real estate. The CEO where I work as an example holds real estate but he purchased it through the earnings of his business. One idea I have is to house flip or use the @Michael Quarles training to wholetail. And during this time get a go back to get an MS in real estate development that is offered at my alma mater. I am currently in a partnership for a house flip but I am only a private lender for the deal.

There is no right or wrong answer there. But I'll give you my answer based on what I'm reading into your question. And then I'll give you my reasons why. Your question is how do you build "massive wealth the fastest".

There are two pieces there - massive wealth and fastest. I only do buy and hold for SFHs and I can say that whether its SFH or multifamily or commercial, buy and hold is not a strategy to build anything the fastest. Its slow and steady wins the race.

So buy and hold is out. And then you get to the key word massive. Well, you can make money flipping houses but I don't think you can make massive wealth flipping houses. 

So to me, I think the answer to your question would be to flip multifamily (apt building) properties. And in order to do that, I'm thinking that your only option to flip multifamily properties would be those that are value add opportunities - i.e. tons of deferred maintenance, low occupancy, etc, etc.

Buy em at a discount, get them stabilized again over a 2 or 3 year period, then flip them for profit.

You need multifamily because the numbers are greater there so building massive wealth can be accomplished. And you need to flip since you're going to be hard pressed to buy and hold the properties and build massive wealth. Then again, if you buy the value add play properties, stabilize them and refi them, you would technically have built massive wealth just the same. It would be in equity on the property but still....

@Mike H. That is such a great point. With multi family repositioning one can take advantage of the economies of scale. I remember listening to one of the podcasts in which the guest was doing that, and even converted a small hotel or motel into an apartment community. I will run hypothetical numbers on this business model to compare it to a real estate development project. I want to see which of the two assuming a similar amount of investment capital, would typically yield a larger profit in the shortest amount of time. Thanks again, I just hear a lot of investors say to find out your goal and the work backwards from there, so I'm trying to do just that.

Diversification minimizes risk as future is highly unpredicable

@John De La Garza The answer to your question is: It depends.  Where are your knowledge, skills, and abilities strongest? hat are you passionate about? What do you define as massive wealth? $10M, $100M. $1B?

 A lot of folks have given great advice of how they would think they could generate wealth. That may or may not be applicable to you,because you aren't them. If you ask Phil Mickelson the key to his wealth, he may say his short game. That doesn't mean its a great idea for you to hit the putting green.

 Do you have the skills to start a business? If so than, flipping, developing, full time investing may be for you. Do you have the skills to run a business with 100+ employees and $100m+ in Revenue? Do you have a high earning potential in your current field? Then maybe passive investing better for you. Neither is "faster" since they depend on the wildly varying factors. 

I'll point out that Warren Buffet made 99% of his wealth after his 50th Birthday.

The answer to your question is: It depends. Where are your knowledge, skills, and abilities strongest? hat are you passionate about? What do you define as massive wealth? $10M, $100M. $1B?

A lot of folks have given great advice of how they would think they could generate wealth. That may or may not be applicable to you,because you aren't them. If you ask Phil Mickelson the key to his wealth, he may say his short game. That doesn't mean its a great idea for you to hit the putting green.

Do you have the skills to start a business? If so than, flipping, developing, full time investing may be for you. Do you have the skills to run a business with 100+ employees and $100m+ in Revenue? Do you have a high earning potential in your current field? Then maybe passive investing better for you. Neither is "faster" since they depend on the wildly varying factors.

I'll point out that Warren Buffet made 99% of his wealth after his 50th Birthday.

@Bill F. Thank you for your response.  

Knowledge

I currently feel that I am comfortable with taking on my first flip project.   (I have been researching this a lot, read JScotts books as well as the book flip)

I feel that I do need more general business knowledge (should have gotten a business degree, which is partly why I am considering going back to grad school to get a masters business degree with a real estate concentration)

Skills

I am good at management and sales and negotiation .  I did great at commission sales and have now been in retail sales for 10 years.  I became a sales manager after 6 months and then a general manager and have been promoted to larger stores and currently run the largest in my company.  I am currently being trained to be a regional manager.

Abilities

Learning (graduated top 1% of my class and I read alot).  Time management.  Meeting deadlines and commitments or reporting otherwise beforehand.  I manage my money well (keep expenses low etc.)  

Massive wealth, 

To me this is in the multi billions.  

Skills to start a business, 

Which skills would you deem necessary to start a business? (I have not started a business, yet.)

-I currently have 45 employees (or 45 personalities) and the revenue is $25m but I am only the general manager not the owner and there is division of labor so I am not involved heavily in alot of things such as accounting, marketing as there are entire departments that carry those things out for all locations.

I'm not sure how you would define high earning potential in my field.  I currently earn over 100k as a gm.  I do not however want to be a passive investor.

What I am passionate about is business, learning and achieving my goals.

My current thought process is this...

1. Start a flip business (I'll be doing my first solo project as soon as the house I have on the market (with a partner) sells or I get enough investment money to cover the entire project.

2. Continue flipping (always re-investing the profits until it is not feasible for me to keep my w2 job anymore) and snow ball the flips until more and more are being done at the same time.

3. During this time flipping I can potentially complete an MBA or MS with a RE concentration. (if this is the way to go, then I would probably slow down on the flipping a bit or maybe just fund someone else's flips until I graduate).

3. Once enough capital is raised, and I have some CRE knowledge and contacts (networking) I would like to get into commercial real estate. I'm not too sure what type yet, I think this would become clearer as I learn more about CRE potentially development.

Another thought process however could be to just learn as much as possible about CRE wile just having my W2 job and funding my partner's flips. I could then leverage my knowledge, partner with someone who has the capital and get into CRE that way.

I am trying to work backwards but its hard to do as my goal is so high.  I think I may just go with my first thought process until things become clearer. 

Syndication: You get to use leverage (bank), use of OPM (investors for the downpayment), exercise your entrepreneurial skills to create value and take advantage of favorable tax laws. Work with a syndicate and learn the business. You can syndicate anything but let's say you do MF apartments since that has been a strong wealth creator that has earned its stripes and offers a favorable future based on a number of demographic, economic and behavioral trends. Once you have earned some experience (track record), set off on your own and start your own CRE syndication business. As the GP you could get say 30% of the split (say you get 10% of the 30% for being a key principle adding value such as raising capital, finding the deal, asset management, etc).

Syndication is a team game to if you want to go big, find some solid partners that have skills you don't have but need.  An experienced syndicate team that develops a proven track record and can get their investors solid returns will be in demand, capital will come and you are basically matching deals w/money.  GPs do put money into the deal but the return on their personal investment can be very significant if they add key value as they could earn say 10% of the entire deal as one of the key principles in the GP.

there are many ways to skin this cat.

Leverage and team is important as @David Thompson was mentioning.

I will give you another one to think about.

what I did was raise some friends and my own cash and got 4 to 1 leverage for a HM lending lines of credit from banks.. we started with 1 million in capital which got us a 4 million dollar loan.. so had 5 million to lend out.. paying bank 1 point and 6%  and lending at 15 to 20% apr and making the delta.

we ran that up to 35 million.. and that took about 14 people to run.. I had controlling interest in the company took a very tidy annual fee and of course had the ownership. A company of this size properly run will make you easy 1 mil a year plus equity and retained earnings that you pump back into your loans. And as it matures your in the CEO type job description.. Granted your working a JOB but if your making 1 million a year owning rental properties your probably working as well. And many have done this in the last few years by starting crowdfunding sites that are basically just HML ers..

Thank you @David Thompson for that information. I'm going to look into syndication some more. Sounds like a great way to get started in CRE.

On the development end.. deals I do now a day are closely held partnerships.. we are tieing up larger projects 10 to 20 million.. with fairly large EM deposits  100 to 300k.. and then doing the up front work to get them approved usually 200 to 300k.. but as I am working them through I have purchase contracts from the national builders..  and with leverage we are looking at 4 to 5 to one.. profits. in 24 months or less..

Thank you guys again for your feedback here.  You have given me a lot to look at.  

you should look up Bruce Norris in LA... I do exactly what he does.

I do both currently .. the lending type activity is my cash flow like those that hold rentals.

and the developments are my big hits.

along with new home construction.. we are weaning off of doing fix and flip.. as those can be a little more risky than the new construction. and by that I mean you don't really know what you have until you open the walls.

with the new construction I can hit my numbers within 2 to 3% every time.. so easier to manage that way... plus a hell of a lot less competition.. every body and their mother and brother is chasing the same fix and flip.. not so in ground up.. takes another skill set and frankly a little more financial horse power

we will do 40 plus homes a year and have been for a few years now.. with average profits in the 40 to 50k per home range these are selling for 350 to 750k.. bigger ones we can hit 100k per door and I have hit a few in the 150k per door range.. along with very favorable finaincing form my banks at 6 to 7

% apr and only pay on drawn funds.. the return on equity or cash is easy 100% per 9 month build and sell cycle.

the lending we do is niche and its really NOT lending .. I don't lend.. I create capital LOC's for bigger higher volume players.. I don't deal with one off borrowers or developers etc..

@John De La Garza   not really just a nature progression after 40 years at this.. and making millions and losing millions in the crash of 08... forgot to mention that.. LOL... its not all been roses.. but at the end of the day we survived.. Bruce Norris also has an annual even called "I survived real estate" it was more germane post 2008 to 2010... but there was a lot of us that got our clocks cleaned.

and there are a lot of investors who have started post GFC that only know a rising tide... and really have never worked through a retrench..

I am not predicting a retrench anytime soon.. Bruce was talking about multi being frothy because cap rates have been crushed and we are seeing in some markets rents softening and falling. ( mainly higher end A class stuff)..

But have some patience it takes some time ..

the folks that I have seen make the most money though quickest are Bay area tech types or those that owned business's and were able to sell for big bucks or take them public and when their stock became unrestricted cash out.

@John De La Garza Its obvious you have put a time into self reflection and that's awesome. Funny you should mention grad school, I'm applying now and thinking of Commercial Real Estate after graduation. 

As for the skills needed to start a business, man that's a tough question and I wouldn't know where to begin. I come from an operations and management background too where a lot of the nitty gritty was handled for me, so I'm wholly unqualified to answer that question. One common trend I've seen through my reading about business people, whether they  be entrepreneurs or CEOs, is an ability to judge people's character, formulate, communicate, and lead the implantation of a plan, and make decisions. @Jay Hinrichs knows much more about this than I do. I'd recommend this book if you want to learn about what it takes to run multi billion dollar corporations. 

I don't have a great definition of earning potential, but it compiles your knowledge, skills, and abilities, with your education, network, training, and years left to work to get a range of how much money you'll make in your life. For example a neurosurgeon has a higher earning potential than a college professor. 

You have a solid plan for flipping. Do your first few and see how it goes. If you find out its not for you, re adjust. That is the beautiful thing about REI and business in general. You don't need a 100% perfect plan to be sucesful. Once you have goals, mission, and endsate defined, the road can take you anywhere.

As this 'fourth technological revolution" moves on, REI and business will change a lot so the skills that made fortunes today may not exist in 10-3 years.

I've read on this forum that you can find reputable PMs to perform the rehabs. Was curious if anyone has found success doing rehabs with a PM remotely?

@Bill F. Thank you, your questions really got me thinking tonight.  Congrats on your upcoming graduation!

@John De La Garza For this next 2 years, tract homes are the easiest gainers. It depends on the demand. But, I wouldn’t even think that far if you are starting out. Having big goals are easy, but I say start with a flip, something you could execute. Nobody is going to give you chunks of money for your 50m deal without any experience. Remember those big names came from their first small deals, and probably funded from their own pockets, now their are selling their time and talents without using their own money to people who was nothing to do with theirs. In my opinion, it is still a job, it’s just higher management, to out together a deal and finding the deal still takes some sort of work.

I would go with rentals/apartments/commercial. I have done a lot of flipping and buy and hold and hands down the buy and hold has created more wealth. From 2008-2015 I did 150-200 flips and also bought 75 rental units. In 2015 as I stopped to think about what I was doing, I ran the numbers and saw that the rental made more money (when factoring in appreciation because I bought low and renovated). They also cause much less head damage!

My suggestion is that if you want to flip, then flip in order to make money to buy more rentals. 

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