I often tell people that becoming a real estate millionaire is an easy thing to do. They usually give me a puzzled look. I say that it is not necessary to understand all aspects of real estate to start investing. The best thing you can do is start with a basic buy-and-hold strategy by buying whatever type of property you can afford for the least amount of money. How to buy something with as little money as possible depends on your financial situation and the types of mortgages you qualify for. Since the guidelines for mortgages and government interventions change daily, it is impossible for me to tell you the best way to proceed. I can tell you how I’ve done it for years using the installment technique I described earlier in the book. But I’ll give you a quick refresher course below.
If you bought a $100,000 home through conventional means, you may need to put down a 20% down payment of $20,000 plus closing costs which will cost you around $3,000. In this example, you invested $23,000 to purchase a $100,000 investment property. Using the lump sum technique, you would buy a property for $100,000 in cash by putting down the entire $100,000 down payment plus closing costs of $3,000. At this point, you have a down payment of $103,000 on the property and you start investing an additional $5,000 to repair the property. You now have a total of $108,000 of your money in the property. You put the property up for rent and find a good tenant, so now that you’re empty, real estate investment is a money-making, profit-making business. Now you go to the bank and have the property appraised with the intention of doing a cash refinance. Because you repaired the property and it is a profitable business, the property is valued at $114,000. The bank is willing to lend you an 80% mortgage on the appraisal of $114,000, giving you a mortgage of $91,200. He initially deposited $103,000 and received a mortgage of $91,200, bringing his disbursements to $11,800.
By using the down payment technique versus buying a property through conventional methods, you save $11,200. Now, of course, you’ll have a higher mortgage and less cash flow from the property, but you’ll also have $11,200 to buy the next property.
Sometimes the houses you buy will cost you $10,000; other times you will break even. You might even be lucky enough to get paid to buy a house, which happened to me once or twice. The goal was simply to keep buying as many properties as possible until you built up a portfolio worth millions of dollars. You’ll make a profit on the cash flow, but chances are you’ll come back and do things like repairs and vacations on any other issues that arise with real estate. If you end up accumulating $10,000 over the year through cash flow from your properties, you have your start-up capital to purchase additional property and further expand your portfolio.
I have said many times that you will not find cash flow of great value to you. Cash flow will help you pay for necessary things and give you money for future transactions, but in the end you will be working hard for very little money. The real surprise will come when you’ve gone through the cycle from bottom to top and created a gap between the value of your portfolio and the amount of mortgages you owe on the building. By accumulating equity in your properties, you will slowly begin to see your net worth increase over the years.
For example, let’s say you purchased one property per year for five years valued at $100,000 per property. In the five years he bought the properties, the values went up a bit and the mortgages went down, and his net worth is the net worth in the middle. When you start to see this throughout your investing career, especially when the market is rising, it can be an exciting time.
Your expectations should be to live off the income from your job, while the profits from the property rental business are used to meet your needs.
