How to Make a Million Dollars from Real Estate: A Step By Step Path

The guy who invented the pet rock made a million dollars.

So did the guy who sold  a million pixels on a computer screen for $1.00 each.

Don’t forget about the guy who invented goggles for dogs and made a million dollars.

There are a lot of ways to make a million dollars but unless you happen to get really, really lucky – you aren’t going to invent the next new thing. Instead, most individuals turn to three different means of building that kind of wealth:

  • Stocks/Bonds/Mutual Funds/etc
  • Business creation
  • Real estate

There are plenty of examples in all three of these categories of people who make a million dollars from their investments. I’m sure you’ve heard the stories from individuals like Warren Buffet (stocks,) Bill Gates (Business,) and Donald Trump (Real Estate) and the honest truth is – any of these three categories can make you a million dollars. However – the road to making a million dollars through stocks is slow and methodical, while the road to making a million dollars through business is paved with immense risk and, at best, unpredictable. There is nothing wrong with either of these two categories – and I believe both can be instrumental in your wealth growing strategy.  However- while there are multiple paths to get to a million dollars (and more,) I believe that real estate investing offers the strongest chance of building wealth in the shortest amount of time!   (Tweet This Quote !) Often times discussions on real estate investing is rich in “theory” but short on practical examples.  The purpose of this article is to demonstrate my  beliefs on wealth building with real-world examples and share just one method (of hundreds ) of making a million dollars through real estate through a fast but methodical path. This is much of my philosophy behind real estate, summed up in a simple article. Before I begin, though, I want to make a few points clear:

  1. This is not a “get rich quick” plan. It takes place over seven to ten years. It might take longer, it might take less.
  2. This is not the only way to make money in real estate. Just one path that I like.
  3. This is not a guaranteed plan. This works based on ideal numbers. You might find things better or worse, depending on your location.
  4. This is not legal advice.

Let’s get going. If you have any questions – please leave me a comment below this article!

(Before we get too deep in this post, we want to invite you to download our book “The Ultimate Beginner’s Guide to Real Estate Investing ” which will help you build a solid foundation for your financial future. In other words – you are going to learn exactly how to get started building wealth with real estate! To get the book, just click here and join BiggerPockets, the free real estate investing social network!)

How to Make A Million Dollars: Setting Your Buying Standards

If you want to make millions in real estate – you can not just buy any property. The vast majority of properties out there are terrible investments and will end up costing you more than you’ll make. Instead – there are certain “standards” that you must adhere to in order to make this plan work. The following is an example of the standards I am looking at for my first investment:

  • Multifamily property
  • Cashflows at $200 per unit, per month after following the 50% rule ($800 total cashflow)
  • Property must be able to be purchase for 80% of the value (using smart buying techniques)
  • Property must be able to be improved 10% during the first year (paint job, some landscaping, and other small things)
  • Property will appreciate at 3% per year after year one.

You may be tempted to say that these standards are impossible to find 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 might be different – but these locations do exist. (And to quote fellow blogger Jeff Brown. “What’s more important to you — being able to drive by your units, or driving to the bank with much larger bank deposits in retirement? Your choice, no hurry, take your time.”)

Buying Your First Property

Using these conditions, we were able to find a four-plex that needed a little “help.” Perhaps its a bank repo that smells like a hundred cats, or a FSBO of a retired couple looking for cashflow. I’m not talking about a disaster – just something that needs some cosmetic help. The property is listed at $100,000 but we are able to buy it for $80,000. For simplicity – we’ll say that the bank will pay our closing costs which means we are required to put down $16,000 for a 20% down payment.  Additionally, we will spend $4,000 on minor repairs and improvements to satisfy the 10% appreciation during the first year requirement.

Year One:

So, to sum up our portfolio after year one:

  • Our loan is for $63,500.00 (approx.)
  • Our value is at $110,000.00 (10% appreciation during year one)
  • Our cashflow saved (from cashflow): $10,000 (Okay, technically $9,600. I like easy math.)
  • Total Equity: $46,500.00
  • Our total net worth: $56,500.00

Now, I just want to jump in here quickly and remind you: this kind of property doesn’t exist on every street corner.  Is it hard to find these properties? YES. Is it hard to find these properties if you only need to find one property every two years across the entire US? I don’t think so. Moving on.

Year Two:

Nothing changes during year two. The property simply exists. Each month you just maintain.  Maybe flip a house to keep from being bored! By the end of year two, our portfolio looks like this:

  • Our loan is for $63,000.00 (approx.)
  • Our value is at $113,300.00 (3% appreciation during year two)
  • Our cashflow saved (from cashflow): $20,000 (approx.)
  • Total Equity: $50,300.00
  • Our total net worth: $70,300.00

Year Three:

At the start of year three we are going to buy our second four plex, using the $20,000 we have saved from the cashflow. It’s going to be exactly like our first. Identical – same numbers, same price, same cashflow. Remember – this is an “ideal” scenario just to represent how this works in the real world. Maybe you’ll buy a five-plex, or a tri-plex, or four houses. The math is what is important. So, we now have two income streams going: Fourplex A and Fourplex B. For the sake of time, I’ll just post our totals for the end of year three below:

  • Our loans are for $126,000.00 (approx.)
  • Our value is at $227,000.00 (approx.)
  • Our cashflow saved (from cashflow): $20,000 (We used the previous 20k for the last down payment.)
  • Total Equity: $101,000.00
  • Our total net worth: $121,000.00

Year Four:

At the end of year four, we are going to “Rinse and Repeat” once again. You guessed it  – another four-plex, same numbers. We now have three streams of income going: Four-plex A, Four-plex B, and Four-plex C. The end of year four totals look as follows:

  • Our loans are for $177,000.00 (approx.)
  • Our value is at $350,500.00 (approx.)
  • Our cashflow saved (from cashflow): $30,000 (10k from each)
  • Total Equity: $173,500.00
  • Our total net worth: $203,500.00

Year Five

At the end of year four/beginning of year five we are going to make our first “trade up.” If you are familiar with the game of Monopoly – you’ll recognize this strategy. Essentially – we are going to trade our “houses for hotels.” In this example, however, we are going to trade our three four-plexes for one apartment building. As you saw at the end of year four, we have accumulated approximately $203,500 in equity. During the “trade up” there are going to be certain costs associated with it (such as Realtor fees, closing costs, etc.) To avoid the taxes, we will be using a 1031-tax exchange to defer taxes to a later date. After all expenses are paid out, we will have approximately $175,000 remaining to invest in our next property. As you can probably guess, we are going to use this as a 20% down payment on our next investment, allowing us to pay up to $875,000 for a property. With our new property – we are going to buy a property using the same “standards” as above, which were (for reminder)

  • Multifamily property
  • Cashflows at $200 per unit, per month after following the 50% rule ($800 total cashflow)
  • Property must be able to be purchase for 80% of the value (using smart buying techniques)
  • Property must be able to be improved 10% during the first year (paint job, some landscaping, and other small things)
  • Property will appreciate at 3% per year after year one.

Thus, we are able to find an apartment building listed at $1,000,000.00 but we end up getting it for $800,000.00. Our 20% down payment makes the loan amount $640,000 and leaves us approximately $13,000 for minor improvements to be able to raise rent and force the 10% appreciation. (12/13/12 – CORRECTION: This post originally stated that the Total Loan Amount would be $740,000, but it’s actually $640,000 as states above – which adds quite a bit more equity – values below are updated to reflect the correct number ) At the end of year five. our portfolio looks like this:

  • Our loan is for $625,000.00 (approx.)
  • Our value is at $1,100,000.00 (10% during year one.)
  • Our cashflow saved (from cashflow): $57,600 (24 units x $200 x 12 months)
  • Total Equity: $475,000.00
  • Our total net worth: $532,600.00

Year Six

Nothing happens during year six. Just relax and collect the cashflow, saving every penny for our next trade-up. At the end of year six. our portfolio looks like this:

  • Our loan is for $610,000.00 (approx.)
  • Our value is at $1,133,000.00 (10% during year one.)
  • Our cashflow saved (from cashflow): $115,200 (24 units x $200 x 24 months)
  • Total Equity: $523,000.00
  • Our total net worth: $638,200.00

Year Seven

Year seven is another year of rest – if you can call it that! Simply save and collect. At the end of year seven – our portfolio looks like:

  • Our loan is for $595,000.00 (approx.)
  • Our value is at $1,167,000.00 (10% during year one.)
  • Our cashflow saved (from cashflow): $172,800 (24 units x $200 x 36 months)
  • Total Equity: $572,000.00
  • Our total net worth: $744,800.00

Perhaps you want to simply live off the cashflow from this point on. You are making a respectable $57,000 in passive income. However – you only have three-quarters of a million in equity. To get to the final million – you’ll need to make one final trade-up.  Perhaps you do this right away during year seven – or perhaps you wait five years. Work with the market- 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), subtract out the sales expenses ($94,800) to give us a nice round  final profit of $650,000.00 to use for our final down payment. Our final purchase is going to be a 75-unit apartment community listed for sale at 3,400,000.00 but we are able to purchase it for just 2,750,000.00 (20% off.)   We’ll use the down payment of $650,000 (making the seller pay closing costs) to make our total mortgage amount of $2,100,000.00. At this final part of our “million dollar journey” – the end of year seven or start of year eight – our portfolio looks like:

  • Our loan is for $2,100,000.00
  • Our value is at $3,400,000.00
  • Our cashflow saved (from cashflow): $0 (but $15,000 per month going forward)
  • Total Equity: $1,300,000.00
  • Our total net worth: $1,300,000.00

We did it! One Million Dollars (1.3 million, actually), with only five purchases in seven full years of investing. (***Correction: Special thanks to Will Barnard for pointing out I was neglecting to count a full $100,000 in my original numbers! Originally the math worked out to $1.2 million – but with correct math it’s actually $1.3 million!)

Final Thoughts

Remember – this is an ideal situation. Many people have moved much faster, others have moved much slower in their investment journey. The purpose of this was simply to give you a “big picture” idea of how this works and provide  a good illustration of what I call “trading up.” What are your thoughts? Does my math make sense? (forgive me if I made any errors -You should see the speed at which I’m writing this thing!) Leave me a comment below and please share this if you know anyone who might find value in it! Photo: Woodly Wonderworks

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Source: www.biggerpockets.com

Category: Forex

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