Building Your Wealth Quickly Through Real Estate
Many Millennials are discovering they can quickly build their wealth using easy to understand strategies to acquire real estate. Providing your credit score is 650 or above, you can certainly do the same.
After the 2006/07 crash, I watched my own IRA cut in half almost overnight. I was so angry that I began researching how to build wealth through something with much more stability. The problem I have with stocks is the fact that it’s a “virtual asset” with high volatility with every news headline.
With real estate, I have something solid I can touch and fully control. It’s a physical asset. So why wasn’t I put off by the real estate crash? Because I understood the main factors that contributed to it were outside of real estate. Lending standards dropped dramatically in 2004/05 and people who were not previously eligible for a
What caused the bottom to fall out was when the jobs disappeared almost overnight. Suddenly, people were unemployed with little or no pensions left because the stock market crashed just before then. There was literally no work to be found. Hundred of thousands of people had no choice but to walk away from their biggest asset. That lead to an explosion in real estate with homes selling like hot cakes at ridiculously high prices.
The sudden overwhelming number of houses that hit the market and little to no buyers is what caused home prices to plummet. I saw this as an opportunity as did many other investors to acquire great property at very low prices and rent them out. The buy and hold strategy is what worked because rentals suddenly became very popular and as such, the monthly rates went up.
Look, people always have to live somewhere, right? We all need a roof over our heads. Real estate will always be a valuable asset. Within five years, investors started to see the value of their properties they bought for pennies on the dollar, start to show signs of growth again. All the while, they enjoyed the extra income and the growing equity as tenants paid down their low-interest mortgages. It was one of the greatest win-win scenarios I’ve ever seen and probably will ever see in my lifetime.
Fast forward to present day, unemployment is at an all-time low in nearly every market sector. December saw the highest number of new jobs, 312K ever recorded in a single month. Interest rates are still well below what our parents had to pay. Contrary to fear mongers out there, all indications are that the housing market is stable and continues to grow. I go into more details and lay out the facts in my blog, “2019 Housing Market Forecast: Facts Not Fiction”
The last two years, saw market values grow as much as 10% in some areas of the country. That pace has slowed down and holds steady at 6% nationally. Still growing, just not as fast due to the recent Fed interest rate hike.
Taking advantage of the booming economy, I’ve since leveraged several of my rentals to purchase additional income property, build my monthly income and overall net worth. Now I enjoy helping others do the same.
Putting Equity To Work
Use the equity from your existing home to purchase multiple properties 20% down & finance the rest and rent covers your monthly costs plus extra. Look at properties that need rehab or already rehabbed to save you time. Get familiar with the rental rates in particular neighborhood thru Zillow.
The BRRR T
BRRRR allows you to purchase more properties more frequently. Thereby building your monthly
When you buy a deal below market value, you’re making the majority of your money at that time. Therefore, your
Making the cosmetic changes and needed repairs will improve the market value of the property. If you pay too much up front, you won’t be able to make it up by over improving it or raising the rent too high. It always ends up backfiring on you!
You could easily end up with a lovely over improved property that will not rent because the rent you need to make the numbers work is now too high for the area. Instead, you end up having to lower your rent just to get it occupied, knowing it could take you ten years or more to recoup your initial investment money.
Keep Your Head In The Game
Buying distressed can be a good deal so long as the repairs needed are mostly cosmetic. It is definitely worth repairing and updating to a point. Keep in mind you are not living in this unit.
The problem a lot of novices get into is over improving the property and spending way too much. You need only to provide a clean and safe environment to attract a tenant. Make sure all appliances and utilities are in good shape and work properly. Cover up any holes in the walls, fresh paint, flooring
That’s why having a professional on hand, preferably someone with hands-on experience in rehabbing rental properties is so very important to your success. They can keep you in check and help you set up a budget and stick to it. This is the extra mile I’m happy to provide to my clients because I want them to succeed as I have done.
If you don’t know of anyone personally, look for a real estate agent who is also an investor with multiple properties. Don’t just take their word for it, ask lots of questions about their own experiences, where their properties are located, does he/she have experience rehabbing properties. You’re looking for someone willing to guide you through. Also, joining investor clubs can also help.
One last suggestion, go to see units for rent in the areas of interest and you’ll start to get a good idea of what’s expected and what the general rental rates are. You’ll also get to know the surrounding areas and which command higher rents. All very good information to know and understand as you start your journey into real estate investing.
Leveraging Your New Asset To Build Your Wealth Quickly
Now you have an income property which won’t have any issues come up for a long while because you’ve already fixed it up and eliminated any big issues prior to renting it out. The repairs also enable you to charge more rent and attract a better quality tenant.
Cash out refinance on the property that’s now been fixed up. Six months later, that $126K purchase was now worth $180K.
Now you have $25K to put down towards the purchase of two more properties that also needed some cosmetic repairs and repeated the cycle again.
So by cashing out the capital in that first property, if you’re getting a good deal on that second purchase (again, the purchase price is critical), you’ll immediately start building your net worth and wealth.
Finding A Diamond In The Rough
Now what often happens with distressed properties is that they sit on the market for a long while because no one wants to make the big repairs but if the seller is willing to cover the cost of the repairs by lowering the purchase price, then it’s a win/win for both buyer and seller.
Your Due Diligence Will Pay Off Big
Determine the after repair market value (and potential equity) of a distressed property. Taking into account neighborhood, proximity to local schools, school ratings, shopping, major highways, etc.
Estimate rental rates, holding costs, expenses and monthly cash flow. Take a look at Zillow rentals in the same area and look for comparable properties taking into account number of beds, baths, type of property, location and square footage and uncover the projected monthly income range.
Also, consider how you can dramatically increase the value of a property. For instance, by simply adding a closet and/or window can easily convert an extra space to a bedroom or adding a half bath on the main floor or in a finished basement will make the property more appealing to renters as well. Adding a bedroom will boost your rental rate.
Calculate your financing expenses (lender fees), downpayment, closing costs and monthly mortgage.
Let’s Run The Numbers
Let’s run the numbers on a recent purchase I helped an investor client of mine secure on a duplex fixer upper.
Westland, Michigan – MF 2 Units 2BD/1BA per unit
- List Price: $69,000
- Taxes: $1,855 annually
- Purchase Price: $62,000
- Down Payment: $12,400
- Loan Amount: $49,600
- Home Inspection: $300
- Closing Costs: $500 (would have been $250 for cash purchase)
- Total Estimated Repairs & Appliances: $15,000
- Monthly Rent: $1500.00 ($750 per unit)
- Monthly Mortgage Payment: $519.54 (Assuming 5.5% interest, 30 years and 0.005 PMI) typically includes property taxes and insurance.
- Yard maintenance: $0 – $50/mo.
- Contingency Expenses: 10% = $150/mo.
- Management Fee: 10% = $ – $150/mo.
Net Profit: $1,500.00 less mortgage, maintenance, contingency repairs, and management fee will provide the landlord with a profit of roughly $630.46 in additional monthly income.
Utilities: All or most of the utilities should be paid for by your tenants. Sometimes there are exceptions to that. For instance, if the property contains a well, there is no water bill. Another example is that some cities in certain states such as in New
Management Fees: Management fees are often negotiable, especially if you have multiple properties. Location is also a big factor. Vacation rentals and large metro cities, such as Detroit, typically charge 15%-20% per month.
The self-managing investor’s net income would be $780.46 monthly and roughly $9,365.52 annually. Taking into consideration the initial investment total of $28,500 that is a return on investment of 30% and the investment would pay for itself in a little over three years. A fantastic return on investment!
Initial Investment Costs
Let’s take a look at the initial investment costs. Your initial investment expenses consist only of what comes out of your pocket at the start in order to get in the game. It does not and should not include your mortgage payments because that falls under temporary “holding costs” only for the time that the unit(s) is vacant.
- Downpayment $12,400
- Closing Costs $500
- Appraisal Cost $300
- Repairs $15,000
- Home Inspection $300
Original Investment Total $28,500
With a total projected income of $29,772 during the first three years, these buyers will have recouped their original investment very quickly while still building their net worth as the mortgage is paid down and the property grows in value over time.
- Year #1 Income = $6272
- Year #2 Income – $11,772
- Year #3 Income – $11,772
Yard Maintenance: Ground maintenance is typically the tenant’s responsibility and I make sure that it’s specified as such in my lease agreement.
However, for our multi-family units, we cover the ground maintenance (lawn cutting 3 times/months) and snow clearing when needed. On average it typically costs $50/mo.
Garbage Pick-up: Some cities include that service in the property taxes others require you to hire a private company. You can e
Additional Income Potential
- Pet Fee: $25/month
- Late payment of rent charge: $75.00 (if more than 7 days late)
Breaking It All Down
|YEARLY COSTS||YEAR ONE||YEAR TWO +|
|Mortgage (tax, insurance) $519/mo||6228||$6,228|
|Utilities ($50 per unit per month)||200||Tenant Pays|
As you can see, these landlords will take in considerably more just in their second year of holding this property. At which time, they could look into leveraging any equity there through a refinance towards the purchase of their next income property doubling their net worth and increasing their monthly income. Rinse and repeat over and over again.
Keep in mind that every year that your mortgage loan is paid down, increases the equity in the property and also boosts your ROI (return on investment) percentage.
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As an investor and Realtor, I truly do enjoy working with investors. There’s no substitute for a mentor who can keep you away from common pitfalls and guide you through the process over and over.
Please feel free to share your own dreams of real estate investing, offer up positive comments and of course ask lots of questions.