You might have always wondered, “how can I get rich in real estate?” and the truth is all wealth in the world is either made or held in real estate.
When I think of rich people, wealthy people, I often cannot even imagine how a person becomes rich without owning real estate.
As the steel magnate Andrew Carnegie used to say “real estate has made more millionaires than all industrial efforts combined”.
But how can you get rich in real estate?
The best way to get rich in real estate is to follow a very simple formula: Earn active income and convert it to passive income.
What does this mean?
Earning active income is income through your job, or perhaps your business. If you live on 70% of your earnings and invest the other 30% that is a great way to take some money off the table to invest in real estate.
Another option for saving money to invest into real estate would be if you are married to live on one income and invest the other.
When I got into real estate I saved 70% of my income so that I could start investing in a property.
Save your active income and invest it into passive income.
But how does real estate make you rich? And can real estate make you rich?
The answer is yes.
Real estate is one of the most powerful tools for getting rich because it has 6 profit centers inside of it that you can use to your advantage:
- Equity on day one
- Appreciation
- Depreciation
- Cash flow
- Mortgage Paydown
- Leverage
What the rich understand that the poor and middle class do not is how to use the 6 profit centers to your advantage to get rich over time.
PROFIT CENTER #1 – EQUITY ON DAY ONE
Equity on day one, aka purchasing at below market value is one of the best ways and fastest ways to create wealth in real estate and get rich. My team and my students learn to purchase distressed real estate at 40-60 cents on the dollar consistently by focusing on sellers who have to sell NOW. Typically motivated sellers are motivated by death, divorce and downsizing – the 3 D’s. But if you are buying to get rich in the long term, you don’t have to purchase at a steep discount and purchasing at 70, 80 or even 90 cents can make perfect sense. Equity that you purchase on day on is a great way to get a jump start on your net worth and serve as a foundation for getting rich in real estate.
PROFIT CENTER #2 – APPRECIATION
One of the great things about real estate is that they aren’t making more if! But they are printing more money every day at the government. Every year inflation is at least 2-3% and this forces real estate to appreciate every year. Over time, real estate “always goes up” because the government prints more money. This is a great way to get rich over time because if you hold onto your real estate long enough, the appreciation will be huge. However, make sure you aren’t only relying on appreciation – there are 5 other profit centers to take advantage of whether your real estate appreciates or not!
PROFIT CENTER #3 – DEPRECIATION
Tax advantages are offered to the rich by the government because there are two things that the government doesn’t know how to do 1) Create jobs and 2) Provide housing. Since the government does NOT want to do those two things, they provide tax advantages to entrepreneurs to take those jobs over. One tax advantage that you get in real estate is depreciation. Most of the time you can write off 4% of the value of your property each year and shield your cashflow from applicable taxes.
Another tax free advantage you get from real estate is pulling equity out tax free through a refinance. Since the refinance is debt and not earnings, the government can take no taxes from you. This is one way that the rich pay zero in taxes and the rich get richer!
The last way to avoid paying taxes through real estate is through a rollover or in the USA a 1031 exchange. If you are selling a building you can trade up for a larger building and shield your gains as long as you are trading up. This is available in the USA and in Canada, ask your accountant on how to trade up for larger buildings and save the taxes!
PROFIT CENTER #4 – CASH FLOW
Cash flow is the main reason why people get INTO real estate and one of the main reasons why people GET OUT of real estate! Cash flow is your net income minus expenses and the passive income and mailbox money that you receive every month.
Cash flow is the heartbeat of any business, especially real estate and where the poor and middle class focus on their earned income and increasing their earnings, rich people focus on increasing their passive income and their cash flow!
Cash flow is essential for getting rich in real estate over time and if a property doesn’t cash flow, don’t buy it for the long term. Cash flow is king!
PROFIT CENTER #5 – MORTGAGE PAY DOWN
Mortgage pay down is one of my favorite profit centers in real estate because it is guaranteed over time. Every year your tenants pay off a portion of your mortgage and over 5, 10, 20, 25 years your mortgage slowly melts away. This is guaranteed equity every year and one of the best profit centers in real estate hands down. This is why debt can be good and why the rich want as much debt as they can get their hands on because over time the debt pays down and it also becomes less significant as the economy inflates.
PROFIT CENTER #6 LEVERAGE
Leverage is one of the best profit centers in real estate because for every dollar you invest the bank will dollar match you to create even bigger profits. Lets say you put 20% down on a property $20,000 on a $100,000 property. You bring $20,000 and the bank brings $80,000 through a mortgage. For every dollar you invest, the bank is giving you 4 more dollars to invest with as well. So if you make a 10% gain on your $100,000 property you infact make a 50% return because your $20,000 just gained $10,000 which works out to a 50% return instead of a 10% return had you bought the property all cash. The magic of leverage is a serious reason why the rich get richer through real estate and the poor and middle class do not.
So can you get rich in real estate?
Yes you can.
The best way on how to get rich in real estate is to follow the monopoly strategy – 4 green houses and 1 red hotel.
Purchase 4 small cash flowing houses, hold on to them and then trade them up for one red hotel aka a larger property which could be a multi family property or another type of commercial property.
4 Green houses and one red hotel is the secret to winning at the game of monopoly and the secret to getting rich in real estate.
Real estate is not a get rich quick scheme, you won’t get rich over night. But if you are diligent and invest little by little over time, you will get rich permanent!
Good luck on your journey,
Respect The Grind,
Stefan Aarnio
