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Making of a Multi-Millionaire

 Most of us will not win the lottery or invent something that will have us get rich overnight.  So how do we become a millionaire?  Over the last two centuries, about 90 percent of the world’s millionaires have been created from: investing in real estate.  

 Americans are terrible savers and rental real estate helps correct that with lots of benefits.  Here are five reasons why income property can be such a lucrative investment.

1. Potential Appreciation of a Highly Leveraged Asset  -  Let’s look at an example of how leveraging an asset can increase your potential return: If you want to diversify and have $30,000 to invest out of your IRA into real estate (which people do all the time), you can then use leverage and borrow $120,000 from a bank. By combining your money with the bank loaned money, you are now able to buy a $150,000 asset. We will assume that each year, for 10 years, your investment property will appreciate by 4%. In Austin, we could put that at 6-8%.  Here is where the ability to leverage benefits you. The appreciation is on the entire $150,000 asset.  Year 0: $150,000    Year 1: $156,000 (after 4% appreciation) Year 2 would have you at $162,240 value and by year 10 you are at $222,036, year 15 is up to $270,141

 So, after 15 years, your property value would have increased by over $120,000 dollars. Thus, you would have turned your $30,000 investment into over a $120,000 appreciation profit simply by utilizing leverage.  Now imagine having 10 properties like that or $1,200,000!  Hello lottery winner! And that is just the tip of your benefits.

2. Rental Income Is Money in Your Pocket-  Suppose you have one tenant. You charge that tenant $1,400 a month in rent. Your mortgage, property tax and insurance payment add up to $1000 a month. That leaves you with $400 to go into your pocket each month, right? Not exactly.  From this $1,400, you will want to assume about 5% in monthly maintenance costs and 5% in vacancy costs. Therefore, you will put $140 into a designated bank account each month to deal with maintenance issues and potential vacancy costs. When all is said and done, you will have about $260 each month going directly into your pocket!   You just got a yearly raise of $3,120!   It’s no secret that because of depreciation and mortgage interest deductions (if you leverage your capital), your cash flow should be tax-free as well!  Hello Bahamas!

3. Huge Tax Write-Offs for Income Property - As a rental property owner, you are entitled to huge tax deductions. You can write-off interest on your mortgage. You can write-off your insurance, maintenance repairs, any legal professional fees, your property taxes and even travel expenses. When you travel to check on your properties or make payments to family members who manage your properties (such as students away at college) that all can be deductible.  You can see a more extensive list at Nolo.com  On top of all of these deductions, the government also allows you to depreciate the purchase price of your property based on a set depreciation schedule, even if your property is actually appreciating in value.   Of course, you should consult your accountant or the IRS to determine the correct way to file your taxes and the proper deductions for your specific situation.

 4. Your Tenants Will Amortize Your Mortgage for You -  Every year that you own this property, you are using the tenant’s money to pay off your mortgage debt. By reducing the amount of your loan, you will be building wealth as you will eventually be able to access this money either by refinancing your loan or by selling the property.  Your tenant is in essence setting aside retirement money for you each month so you don’t have to!

  5.  And the best for last- Because of all the above you can retire earlier and wealthier while doing very little work.  How can you do this with little or no work? By simply working in the expense of a property management company.  This can be a good idea for someone who wants to try owning a property, but has no interest in day-to-day property management and can live with a reduced income stream to save themselves the headache.  This also makes it easier to buy multiple properties. 

We have seen how your wealth and income grow the longer you have the properties and those ratios only get better the longer you own it as you pay down the debt, while home prices and rents appreciate.  Now there will be dips in the market as we have seen so not every year is a great year but if you are not forced to sell then you are on your way to becoming the next multi-millionaire.   

 

 

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