Can you become rich with real estate investing? Donald Bren, Sam Zell, and even Ty Warner (yup, the beanie baby guy) all made their wealth with their real estate investment portfolio. All of these men have net worth's in the billions of dollars and have made a lot, if not most, of their money in Real Estate. Can anyone do it as you sit wherever you are reading this article? More importantly, can you do it? I’m not going to sit here and tell you that after reading this article you’ll be on your way to being a billionaire, but if you take action, will you eventually have a net worth higher than most? I think so!
First, to understand how you become one of the wealthy real estate investors, let's talk about the ways to make money in real estate investing. There are five different ways you can make money investing in real estate, and the one you think is the most important, I will contest, isn’t even in the top 4.
Number 5. Cash Flow: This is the golden carrot that all YouTubers preach about, but it is far from the most crucial factor when investing in real estate. What is cash flow? The most straightforward definition is the rent you collect minus the expenses you pay, including property taxes, maintenance, insurance, and mortgage. Here is the issue: there will be months or even years when cash flow looks excellent on paper, but one significant cap x expense, like replacing a roof, and all of your cash flow goes to zero. For example, most people aim to cash flow $100 to $200 a unit after paying their mortgage, and a roof can cost $12k on a house, and $20k or $30k on a two to four-unit building. On a house, that is 12 years of cash flow gone with one roof replacement.
But I heard the really rich cash flow in real estate. How is that possible? The key here is paying off your mortgage. With no debt, you can easily cash flow a steady income; if you can have five units all paid off, bringing in $1500 a piece, that's $7500 a month, which is easily enough to cover most insurance and tax bills and leave about 40 to 50% as profit. The other way cash flow starts to grow is by holding for the long term without refinancing; when your mortgage payment stays the same for ten years, and rent goes up every year for ten years, the spread from rent collected and money paid to your mortgage becomes greater, making you more cash flow every month.
A few other tips to make money with cash flow is to buy A plus properties, meaning in affluent areas where the buildings are newer, so there is less of a maintenance spend and less chance your tenant won’t pay rent; the obvious caveat is that these properties are far more expensive. This is where starting with lower-end properties and exchanging them as you gain equity for higher-priced properties using a 1031 exchange becomes the way to grow your portfolio into a cash-flowing machine; it takes time unless you have a lot of capital, but is possible if you give it the time needed.
Number 4. Mortgage Pay Down: As your tenants pay rent, you pay your mortgage. The good news is only part of the money is gone forever (the interest). The part going towards principle helps you build equity, which will help you build wealth. The reason Real Estate is such a great wealth-building tool is it allows you to buy an asset with 20% down. This means that you can pay 20k and own a building worth 100k. As you pay down the loan, you don’t use your money, but your rental income from renting out the property, which in turn, turns into equity. When you pay the home off at the end of the loan, your net worth will have gone up 80K just from paying off the mortgage. Oh, and by making an extra payment a year, you can reduce the time you spend paying off a mortgage by 4 to 6 years. Let’s play this out: if you bought a $100k house once a year for 10 years and paid off the mortgages aggressively using a snowball, meaning once the first one is paid off, you use its rent to pay the second house’s mortgage, and so on, you can easily have a million-dollar net worth within 12 years if the homes do not appreciate at all. But later in this article, I will supercharge this strategy with a 1031 and show you how you can have multiple millions paid off by investing 20k a year for 10 years.
Number 3. Real Estate Appreciation: Unlike buying a sports car, homes almost always naturally appreciate. This is by far the easiest way to make money. I bought my residence in 2021, and today, in 2024, it's worth over 100k more than I bought it for. Houses in 2024 gained up to 8% in property value, which means the 100k house you bought in 2024 can be worth 108K now. That is 8k in one year. You made off your 20k investment a cash-on-cash return of 40%. Try getting that in the stock market. On average, property appreciation is at 2 to 3 percent, but there are spikes like we have had over the last few years.
Let's take our 100k example over 10 years: If there is no good luck and it only appreciates two percent a year, the house would now be worth $119,899. We averaged a 10 percent return on our money annually and doubled our money in 10 years. If we combine mortgage payoff and appreciation, our 20k will turn into 120k in 10 years. That is about a 20% return, give or take, a year.
And we haven’t even talked about forced appreciation yet. What if you bought a home for 80k that needed 20k in rehab, but the value of the property after rehab could be 130K? You can gain 30k in net worth over a few months by working on a home, and you can still be on track to just needing 20k down payment to get started. On a commercial property, all you have to do is get the rent to increase, and the value of the building will increase even if you don’t spend to improve the building.
Number 2. Deprecation: Taxes are bizarre. In the real world, your property's value keeps going up, but in the world of the IRS, your real estate loses value every year at a rate of 1/27th of the home's value. But here is what is great about this: by depreciating the house's value, you can take a loss on your taxes, meaning you can save up to 37% of your income, depending on your tax bracket. There are even more advanced strategies to write off more losses quicker, which we won’t talk about here, that can save you that 37% on even a more significant chunk of your income. There is a world where you can write off enough depreciation to take the money due to Uncle Sam and instead buy another rental property, which is compounding returns.
Number 1. Other Tax Benefits: Depreciation is a huge tax savings, but it’s not the only one. See, you should run your real estate as a business, which means you get to save on taxes for business expenses; this includes up to 37% savings on your car, gas, vacations, tools, computers and more. See when you use something for your business it becomes tax free, saving you big time. I just spent a week in Cancun at an all-inclusive resort at The Bigger Pockets Conference. Man, was that a great time, and it was all tax-free, as my business paid for it.
So, this is not a get-rich-quick scheme, but if you put in the work for 10 to 20 years, you will no doubt be a millionaire at the end of your real estate journey. So, how do we supercharge this? The key is cashing out equity to buy more expensive buildings. Let’s say at the end of year five, you have five houses:
| House | Equity ($) |
|---|---|
| House 1 | 50,000 |
| House 2 | 40,000 |
| House 3 | 30,000 |
| House 4 | 25,000 |
| House 5 | 25,000 |
| Total | 170,000 |
We now have $170k of equity - our original 100k, plus 70k of appreciation and mortgage pay down. We can sell the five homes to do a 1031 exchange and buy a building worth $850,000. This gives us an advantage in a few ways:
- Our two percent property appreciation is now on $850K instead of $500K
- Less maintenance costs, assuming we bought a better-quality building
- Higher depreciation
- More rent comes in, meaning cash flow or mortgage paydown is higher.
After paying down this property for five years, you would have a balance of $516,861.87 left, meaning over 333 thousand dollars in equity. Oh, and at 2 percent appreciation, that is another 70K. If you were to continue those five years by buying a house a year, you would now have another 170k of equity in those houses; if you sold all six properties, you could buy a 2.8 million dollar building. By the end of year 5, you will have over a million dollars in equity by paying down your mortgage. And you could bring in upwards of 200k in rent a year now. That is life-changing wealth and a good income. What you do with the extra cash is up to you, but remember if you can tie it to your real estate business you can save on your taxes. After the mortgage is paid off that is a potential profit of $100 to 130K a year.
So what if you currently have no rental properties? How can we take the extra money you have and turn it into passive income and build real wealth? Let's come up with an over-simplified plan to gain financial freedom using a real estate portfolio:
Step 1
Build your team. You need a good property manager, a few good real estate agents, and a mortgage broker. That should get you started on finding a good deal.
Step 2
Let's find you the right deal. One of my favorite places to find real estate deals beyond realtors is joining a real estate investment group either online or in person. Events are great ways to find investment opportunities that are below market value.
Step 3
Start analyzing at least one deal a day - this will get you familiar with real estate prices, rent prices, and other expenses that you should be taking into account on every deal that you are looking at to determine if it is the right deal for you.
Step 4
Make a plan. Determine how long you plan to hold, how much cash flow is needed per month on the deal, and how much work you'll be doing to add value versus how rent ready you want your property to be when you buy it. Are you going to start with single-family homes, commercial real estate, or apartment buildings?
Step 5
Start investing in the real estate market. Set a specific monthly amount and go buy liquid REITS to help you earn money while you are looking for the right deal.
Step 6
When you find an investment property that you are ready to pull the trigger on, put in an offer and start to cash out your REITS to pay for the down payment.
Step 7
Hire a property management company to run your day to day.sk other successful investors for recommendations if you didn't find a good one in Step 1.
Step 8
Hold the property until your cash on equity return is out of balance and then start looking to 1031 exchange into a better investment to avoid capital gains.
Step 9
Repeat all the above steps until you have multiple properties and have enough cash flow to cover your monthly burn rate or until you have enough equity where 4% of the equity is more than your burn rate At this point, you can sell and go into the stock market and collect 4% the rest of your life.
Step 10
Go live a better life. It's the main reason you put all this work in.
If you're looking to buy property in Chicago or the suburbs of Chicago, we'd love to chat with you when you're in step 1 to help make sure the property you are looking to buy will work for your goals. Click here to schedule a free consultation.
