Explain it to me like I'm 5: How do you get rich in real estate? Seems like it takes many many years to get positive cash flow.

19 Replies

Please help clear my mind from my skewed point of view of how REI works.

My goal is to buy a multiplex apartment building and live in one of the units. 

So I'm guessing that I'd have to put something like $50,000 down for that. That might take me 3 to 5 years to save. So I got the property, and I'm cash flowing a few hundred dollars a month. That's it?!? All that hard work for a few hundred dollars of "free" money? 

How do people make millions of dollars in passive income? Either they have to come from a family with money to bring big down payments to the table, or they have to save and save and live like a hobo for 30 years to build up enough cash flow. 

Convince me otherwise. I probably sound really stupid to a lot of you, but this is the beginner's forum, after all. 

Well, it all depends on the property and the deal, of course.

Sure, there are purchase points and rental markets where your described scenario can and does happen.  However, in the scenario you listed, it's much more likely that instead of cash flowing a few hundred dollars per month, you're cash flowing a few hundred dollars **per door** per month.  So depending on the number of units (doors) in the scenario you outlined, you could be cash flowing quite a bit.

It's all in the deal....

What is a good strategy for someone in their early 30s? Buy and hold or flipping? I really like the idea of owning property and collecting rent. So over time that extra cash flow from my first property could be put into savings and saved up passively for a down payment on my next property, so in 2 more years I can own another one and then I have two cash flowing assets, and it builds up from there. 

My fear is that I save up tens of thousands of dollars only to have the building be condemned or have the market crash and I lose all my carefully thought out hard work. I guess that's a risk which I won't focus on.

A good way is to change your income level from your job or business to plow cash into real estate holdings.

You are generally correct in that if someone makes 50k a year and lives off of 30k then after taxes they will essentially have very little to save.

They either have to rehab a property for increasing the value, have the market increase in value though appreciation, etc. Some vehicle where the equity is increased substantially and they grow off of that.

Example if someone makes 400k a year and they live off of 50k they still have even with taxes a nice chunk to snowball into real estate. The cash in and equity growth starts growing net worth. The cash flow is just really a bonus. 

@Tyler W.

This is not stupid at all and I think its where many people end up because the dollars seem small and its a ton of work and at least I think a lot of risk when you start out. There are more experienced people on here that can probably give you the best answer but here would be my observations:

1) Living in CA I don't think your investment will be all about just cash flow. As far as I know there are appreciation assumptions you need to build in just like NYC or the investment is not going to work compared to investing in cash flow markets. My advice is stay conservative but build something in if you are set on that market

2) Total cash flow in your case probably includes principal payments which is really an investment in paying down the mortgage (i.e. an ongoing investment in the property every year) as long as that investment remains a good one that part is building equity

3) In your case you are talking about living in the unit. Either you can charge yourself "rent" to see what true cash flow or you can think of it as you are living for free. Assuming your property only pays for itself including ALL costs that is a big return. For instance, let's say it would cost you $2K a month to rent. Well that is $24K a year and if your property is paying all costs including the mortgage, well your return is 48% on $50K, that is pretty damn good. 

4) Many of those who got rich I would guess got rich more off appreciation than cash flow.  This is a different topic and it has been discussed a lot on BP. Just look for appreciation in the search box. BP tends to be a little anti appreciation and its definitely a bigger gamble but its where a lot of people made a lot of money esp. when they bought to live because they bought in better areas that went up. 

5) In this case if you are buying a larger multi unit the big gains come from making improvements to the rent, the cost structure, etc. Larger multis are sold on the basis of income so if you increase NOI, the value increases. So let's say you buy this unit and improve it to the point that you can sell it in 4 years, than you roll your improved price into a larger multi occupy the larger multi, improve that and all the while you are living for free. Keep doing this for a while and you can make a lot of money.

6) Owner occupied units that are less than 4 total units get loads of preferential financing so you can put down less money. You may be able to put down less than $50K.

7) Finally, many good investors put down little to no money on their deals either through raising capital from others, no money down strategies or unique techniques. All are discussed here on BP. 

@Brandon Turner wrote a book it that you can find here and writes on it a lot.

http://get.biggerpockets.com/nomoneydown/

Originally posted by @Tyler W. :

Please help clear my mind from my skewed point of view of how REI works.

My goal is to buy a multiplex apartment building and live in one of the units. 

So I'm guessing that I'd have to put something like $50,000 down for that. That might take me 3 to 5 years to save. So I got the property, and I'm cash flowing a few hundred dollars a month. That's it?!? All that hard work for a few hundred dollars of "free" money? 

How do people make millions of dollars in passive income? Either they have to come from a family with money to bring big down payments to the table, or they have to save and save and live like a hobo for 30 years to build up enough cash flow. 

Convince me otherwise. I probably sound really stupid to a lot of you, but this is the beginner's forum, after all. 

 Hey Tyler

IMHO one of the strongest strategies in REI is called BRRR. I believe @brandon Turner coined the term but the strategy is to buy a discounted property that needs some work. Then do the work. Then rent it (hopefully at higher rents due to your rehab work). Finally refinance it (based on the higher appraisal value) to get your original down payment back. If done correctly you have a property that cash flows (even if it's slightly) and you have all of your money out of the property. Now, over time you're getting cash every month AND the renter is paying off your mortgage so you're building massive equity. Since ask of your money is out of the original property you can repeat over and over with that original down payment.

Like you're a 5 year old?   Two words, and without a shred of sarcasm:  BUY LOW.  

It's not always that easy, but that's how you generate cash flow quickly. 

Joe Kling (above) gave you a better synopsis than this, but the 5 yo may get stuck at REI. Otherwise, everything he said. Know your market's overall purchase to rental ratio, understand your expenses and charge it back to the people who actually benefit from the property: your occupants.

@Tyler W.

Am I the only one that thinks a few hundred bucks a month net cash flow for an only $50k investment is a good return?? Ha, assuming even just $400/mo with $50k in, you're looking at a 10% ROI and that's before any appreciation, tax write-offs, etc.

Millions in passive income??  Yeah, that's a huge goal to go after and out of reach for many.  Millions in equity, over a long investment career, not so hard.

I think you should start by clarifying what you want, how much it may take to get to what you want and then start putting the pieces together to achieve it.  Any goal looks insurmountable when it's unfocused and viewed from a 20,000ft level.

Steve McGovern nailed it. You make money in real estate when you buy it. Even if you plan on refurbishing/renovating/redeveloping the property the thesis of you investment plan always starts with the purchase price. Thus your earnings whether cash flow or capital gains begins at the closing table. You mentioned buying one property and then rolling the earnings into more properties. Rolling up real estate in that manner is a solid strategy. I got a chuckle out of your opening "explain it to me like I was a 5 year old". So hear goes, no one, not even the smartest rich guy on the planet got rich by not studying and becoming an expert in the things that got them rich. And the majority of those rich made a high percentage of their wealth through real estate investments. Not all of course, but the vast majority of high net worth individuals owe much of their wealth to real estate. To your comment of living like a hobo, I think many who take on the mindset that living frugal, maybe not necessarily like a hobo, will be more successful than those that don't. My wife lived in that manner for many years to get to the point of buying our first investment property. We did buy a big property, but it took sacrifice and discipline to be able to do so. Turned out to be the catalyst to change our lives. Work on your mindset. Keep in mind very wealthy individuals today are happy to earn 5% on discretionary capital when there is reduced risk. Anything you can do to earn higher on a risk adjusted basis is something you should feel good about. That said, we target value add deals with a minimum IRR of 18% over our hold periods. More risk, but adjusted for the risk the returns are still better than 5%. Now if what I just said sounds like it's Greek then just know you can learn what it all means by reading. Read the books here on BP. Read books about investing in stocks. Read the Wall Street Journal everyday (the online version is great) and learn about investments of all kinds.

@Tyler W.

you are starting in the right place. BP is a wealth of information and very smart people to give you advice. Real estate is certainly a get rich business but it is NOT a get rich quick business. Some other posters have put out good ideas. Buy low. You can build instant profits if you are able to buy a property 20%-30% or more under market. You may only have 30K or 40K to put down but....maybe you have friends or family to provide more capitol. I suggest you start by shopping and finding one deal. Get it done! Buying the first one can be a bit intimidating. Once you have taken one down (assuming you did your due diligence and made sure it was worth the investment) you will have started building your portfolio. At your age, you have years to build a portfolio to provide for you and your family. Don't get discouraged only owning one or two properties. Everyone has to own one and then two before they can own number 12 and 13. Best of luck...

The entry point is what turns off a lot of people to real estate investing.  It usually is a lot of work for not a ton of returns.  However if you buy a property with the potential for appreciation, rental increases and pay-down the debt - the numbers look a lot better in a 5 to 10 year time frame.  

As a newbie investor myself, I fully appreciate the comments shared and would say that most of the feedback is really good. But lets get straight to the point. You (like the rest of us newbies) want to increase your income significantly and you've chosen REI as the vehicle in to help you do that. Right? Right! Now you're trying to figure out what makes real estate the right vehicle to move toward your goal(s).

Let me preface my comment by saying that I'm yet to do a deal myself. So take this with a grain of salt...

But, in my opinion, what makes REI so appealing is that there are several points of entry and not all of them require your own money. I won't go much further with that statement but @BrandonTurner wrote a book that offers some strategies and ideas which you can find on BP at http://get.biggerpockets.com/nomoneydown/ . There are also countless posts on this topic so do some research in the forums to learn more. With that said, my suggestion would be to consider taking a different and more creative approach like partnering with someone or bird dogging or wholesaling or apprenticing. You get the picture. Point is, there are other ways that don't require that you save $50K to purchase a multi-family. At the end of the day every investor is looking for a deal. Find a deal and not only are you in the game but you get to decide how you want to play!

-Good luck!  

Originally posted by @Tyler W. :

What is a good strategy for someone in their early 30s? Buy and hold or flipping? I really like the idea of owning property and collecting rent. So over time that extra cash flow from my first property could be put into savings and saved up passively for a down payment on my next property, so in 2 more years I can own another one and then I have two cash flowing assets, and it builds up from there. 

My fear is that I save up tens of thousands of dollars only to have the building be condemned or have the market crash and I lose all my carefully thought out hard work. I guess that's a risk which I won't focus on.

 Hi Tyler

If you want to make money in real estate flip and hold will only hold your money, your equity will just sit there. I would recommend for you to start by becoming a "live in flipper" in a single family who moves every 2 years, that way you are making your snow ball bigger and not taking on such a huge project of having to work on a multi family. Below is what I suggested to Terry he also wants to grow in the REI, and Tyler you don't need to have a rich family or be rich to do this, you can do it but yes it does take time. I hope what I wrote to Terry kinda gives you a starting point, also check out my other posts they talk about how we started, all we had was a dream ;) wishing you the best.

Hi Terry I read your profile, you want what my husband and I wanted 8 years ago, let me tell you something, what you want takes time, you need to be patient and you need to be smart with your money. I don't know your situation right now but I can tell you the steps we took to get to where we are now: (Keep in mind we have been "live in flippers" for 7 years)

1) pay off all your credit cards, loans, pay off your car ect...

(If you have a house don't worry about paying that off yet, I'll give you an idea of what you can do about that in a bit)

2) once all your debt is paid off, start saving money, you save money by only buying what you need NOT WHAT YOU WANT, so you NEED hygienic supplies, food, clothes (but only once every 2, 3 months making a budget on that of maybe $100 to $150 per person in the house hold) you need gas, utilities, rent or mortgage ect.. you DON'T NEED for example if you have cable with HBO do you really need Netflix and do you really need to go to the movies every weekend, do you need to have all the movie packages that the cable company offers?? Do you need to go to the bars when you can just buy a six pack and drink at home, do you really need to get your nails and hair done at a solon when you can do it yourself, do you need to pay so many phone bills does everyone including your 3 yr old need phones? Ect..So really look at what you have now and ask yourself is this a necessity do I need this or did I just want it?? Once you get rid of all the thing that are not a necessity than you continue to step 3

3) once you take care of step 2 you will see that you are now saving money and you just keep saving all the money that you have left over from pay all your necessities for that month. You start to make that savings grow little by little. It takes time to build a strong foundation to wealth.

4) there you now have $10k saved a few months later you have $20k saved.

5) do you have a house now? If you do does it have equity? If no what can you do to the house to make it have equity, can you updated it or fix the roof what ever it is do it with the money you have saved (I recommend having a real estate agent look at your house and tell you how to increase its value by remodeling it or what ever needs to be done to it). So know you know what has to be done use the money you saved and begin to work on your house.

So let's say you have a house and it does have equity, what now, we'll how much equity, if you SELL it will the equity plus what you have saved be enough for you to use as a down payment to another house but a SMALLER one that might need a bit of rehab or maybe it gives you enough to pay a smaller house that needs rehab in cash. So what I'm trying to say is if you have equity and enough saved you down size you DON'T upgrade, ones you find and buy your smaller house slowly fix the house and wait 2 years, but what are you doing meanwhile well you keep saving money to be ready for your next move. 

Your next move will be after 2 years you sell your remodeled house hopefully making at least $20k on it, so now you have made your money bigger, you now have started a little snow ball, you continue to save and continue to flip, and this will give you the snow ball effect. 

If you don't have a house yet than purchase one by using your saved money to get a small outdated house that you can instantly get equity once you step foot in it. Wait a couple of years and start with step 5.

My husband and I followed these steps but our first flip was actually a house we built. Since 2007 we have been working at it, our $100k has grown over $340k and have been mortgage free since 2008, we are proud to say every transaction since 2008 have been cash purchases and have not lost on a deal as of yet, I believe it's because we take it one step at a time and have built a strong foundation, we started from the bottom with only our dreams to push us to where we are now and still growing. 

4 things to remember Terry

Location, location, location and you need a lot of patience.

I hope this helps or maybe you already knew, so I hope it helps anyone that would like an idea as to how to get started without using or as little loans as possiable and to eventually be mortgage and loan free.

If you want anymore info contact me I will try my best to give you a good answer. ;)

Well, I'm nowhere near being rich from real estate but I'm coach-able and I've found that Brandon Turner's http://www.biggerpockets.com/renewsblog/wp-content/uploads/2015/05/7-Years-to-7-Figure-Wealth.pdf to be a pretty solid blueprint to success.  Cross that with some tips from his No and low money down book and you don't have to save up that $50K out of pocket to even get started.  Set a plan, take action, stick to your plan and you can be on the track to "rich" in no time. 

Hey Tyler! 

The beauty of buy and hold landlording is basically that your tenants buy the property for you. I'm going to use an example of the kind of deal that I think you might well consider. I am leaving inflation, appreciation and a whole slew of other things out of the equation because I'm going for the "like a five year old" explanation, lol! Suffice it to say that it's a little more complicated that this; but not that much.

Say you find a duplex for sale for $150,000, and it's decent enough that you wouldn't mind living there for a while. You could probably get into that for around $10,000, including your downpayment and your closing costs. You rent out the other half for, say, $850. (I don't know your area/market at all, but I'm not totally pulling these numbers 100% out of my hat, I did look at realtor.com for Sacramento ... but only for about half a second)

You make your mortgage payment of $700 or so, plus you have to pay for insurance, repairs, etc. But you have no rent to pay, and your neighbor pays you $850 a month which more than covers those expenses most months. Even if you go no farther in your investing career than this, you can sit there not paying rent for the next 30 years while your neighbor buys you a house. Eventually, you own a 150,000 house and it cost you 10,000. Well, maybe not even that if you figure it paid your rent for you. How much is that worth? If you were to pay $850 in rent for the next 30 years it would add up to a cool $306,000. Not chump change.

Now imagine you saved up some of that money and bought a another house. You put in a modest downpayment and cover some expenses, and your tenants buy you that house, hopefully with a nice bit of cash flow income coming your way while they do it, too. So you get another. Then another. The loans get paid down, you eventually sell the houses and get keep all the money. Ta-daa.

Wealth through real estate rarely, rarely happens overnight. It tends to start verrry slowly, and then it accelerates. The trick is to keep your patience during those first years.

Originally posted by @Tyler W. :

Please help clear my mind from my skewed point of view of how REI works.

My goal is to buy a multiplex apartment building and live in one of the units. 

So I'm guessing that I'd have to put something like $50,000 down for that. That might take me 3 to 5 years to save. So I got the property, and I'm cash flowing a few hundred dollars a month. That's it?!? All that hard work for a few hundred dollars of "free" money? 

How do people make millions of dollars in passive income? Either they have to come from a family with money to bring big down payments to the table, or they have to save and save and live like a hobo for 30 years to build up enough cash flow. 

Convince me otherwise. I probably sound really stupid to a lot of you, but this is the beginner's forum, after all. 

 Here's an article I just ran across - http://www.biggerpockets.com/renewsblog/2015/06/30...

Hope this helps! 

Originally posted by @Tyler W. :

Please help clear my mind from my skewed point of view of how REI works.

My goal is to buy a multiplex apartment building and live in one of the units. 

So I'm guessing that I'd have to put something like $50,000 down for that. That might take me 3 to 5 years to save. So I got the property, and I'm cash flowing a few hundred dollars a month. That's it?!? All that hard work for a few hundred dollars of "free" money? 

How do people make millions of dollars in passive income? Either they have to come from a family with money to bring big down payments to the table, or they have to save and save and live like a hobo for 30 years to build up enough cash flow. 

Convince me otherwise. I probably sound really stupid to a lot of you, but this is the beginner's forum, after all. 

 Do you want to make millions in passive income, or do you want to have a net worth of millions? There is a big difference. If you have ever read the book "The Millionaire Real Estate Investor", he actually goes into detail. I suggest you pick up the book. 

I believe the first thing you should do is get the ideas of big fast money out of your head if you are a buy and hold investor. This is a marathon, not a sprint. You can make a lot of money over 30 years if you are persistent. 

No you don't have to live like a Hobo, but yes you have to sacrifice, you have to live below your means.

Right now, I have been saving for well over a year to make my next purchase. I recently talked to a mortgage provider and found out that I am still at least another 6 months away from having enough for my next purchase. Before I bought my first 2 properties, I saved for 3 years straight. No this isn't a quick way to wealth. No you won't see me driving a Lexus or making it rain down at the local gentleman's club. I realized that if I wanted to truly be wealthy and not just look wealthy, I had to sacrifice.

The other thing I should mention is that at some point you may want to look for partners to help move things along more quickly.

Invest....wait....sell

If you are  really low on cash and you have time

Be a real estate entrepreneur

Pretty house - no equity - do a subject to, wrap or lease option

Minor rehab - give equity on a note and get on title, fix it with private money, sell it, Pay off the private loan and the sellers equities note, make the JV fee of 10%

Major rehab- Wholesale flip or retail JV w partner

You can do all of this but you need the basics

And your personal credit is not coming to play

You Need to be a transaction engineer and not a one trick pony

Search these terms on BiggerPockets and learn the basics

Getting a real estate entrepreneur and acting as a business entrepreneur is generally the way to go

I say think like a wholesaler act like a rehabber. Find good deals and either wholesale them off for small chunks of money or get a loan and flip them for big chunks of money. Do it enough for a down payment on a conventional loan or pay all cash. Then refi rinse and repeat. Make as much money as fast as you can, while picking up as many properties as possible. Maybe start with some sfh's and get your feet wet and when you're able jump into multi's. 

I'm in the process of this right now. It's taking some time to get to where I am now but I came from nothing. I'm kinda like Grant, lol where I take massive action to speed up the process of building my wealth. I don't have time to wait years to buy 1 or 2 properties and hope for appreciation and such. Life's to short for that.

This forum is your jumpstart/learning curve to getting to where you wanna be. As you can tell by all the people willing to take their time to give you what works for them in the real world of investing. Take it and run with it!

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