How to make your first million in real estate in 6 years:
Step-by-step
instructions
Leveraging rental opportunities while using capital gains effectively
Over the past 50 years, home prices in the United States have increased by an average of more than 5% per year, according to the National Association of Realtors. The $200,000 home you buy today could be worth more than $864,000 30 years from now when your mortgage is fully paid.
Using Property Management to build wealth
Unsurprisingly, real estate is seen as an effective way to build wealth while leveraging property management to improve your quality of life.
But only some people take advantage of the opportunities presented to them. According to a report by the National Association of Realtors, the average homeowner only sells their home every ten years, even though they enjoy a tax-free capital gain every two years. Instead of expanding their real estate holdings and experiencing that 5% growth, they adopted a standard single-family housing approach, thinking more about it than being overly complicated and time-consuming.
But making your first million in property management is possible as a real estate entrepreneur and more accessible than you think if you stick to the proven track record and the evidence of countless aspiring real estate moguls before you.
It's about expanding your real estate portfolio. The bigger it is, the more valuable that 5% growth is. To do this, start by home shopping smart, live within your means, make the right upgrades, generate income, and convert those profits into additional properties.
The most effective part of using this process is that you can continue your career. It takes about six years to complete the whole process, and if the entrepreneurship skillset is used effectively, this is the path to becoming a millionaire.
Leveraging fixer-uppers to get started
For new real estate investors, nothing has the potential to be as impactful as your first home. When you buy a house to renovate, work on it yourself, and resell or rent it out after a few years, you can add real value to the property, and you don't have to pay more than your standard mortgage payment.
You'll take out a loan for this purchase and want to find something below-market that you can invest in with some hard work, sweat, and effort. Efforts can include everything from new landscaping to interior upgrades to a new roof or partition. Modern features are expected, such as a new HVAC system and energy efficiency upgrades to make the property longer livable for the next owner.
On to the next opportunity
After a few years, you sell the asset, collect the proceeds, and celebrate your hard work. If you bought the house for $250,000, made some essential upgrades to the property, and could profit by selling it for $350,000. That is $100,000 in capital gains that are tax-free pocketable funds. Taking that $100,000 and splitting it in half, with 50% toward the down payment of another property, which you will occupy, upgrade, and sell while using the other half to buy a rental property.
Repetition, repetition, repetition
Again, you are renovating your house, but at this point, you have a rental property that gives you extra income. After about two years, when you finish repairing your second home, you sell it and start over, buying more rental units. You move into a house and fix it up, and in the next two years, you can now start borrowing against the equity in previous rentals to buy more.
From then on, you use the equity you've accumulated in your properties to finance your purchases, which you repair and add to your rental portfolio, Increasing your income step by step. Even better, the value of your real estate portfolio is now more extensive and growing, so you're building your overall wealth as you go through this process. If you continued down this path, after six years, you would have lived in three different homes that you repaired and sold, had a portfolio of 10 rental properties, and had a net worth of nearly one million dollars. Between the net worth of your property and the money from the sale of your home, not to mention the monthly cash flow.
Using Taxes as leverage to grow wealth
The beauty of this approach is that you accumulate more and more value in every home you buy. However, instead of just one home, you now have multiple rental properties that are increasing in value, and you can use your equity or proceeds from the sale of each house to buy more properties.
The first tax advantage of this strategy is the primary residence exemption. It allows capital gains of up to $500,000 every two years, but you must live in the house for two years. Sell it every two years and turn that tax-free gain into more properties, allowing you to use that net profit to invest in new properties.
Recent tax changes mean there are limits to what you can claim on your primary mortgage and property taxes, but these limits do not apply to rental properties. These limits not being involved will mean that most of your loan should be on your rental property, not your primary residence. After a few years of following this formula, this goal will be achievable, allowing you to buy your own home entirely with cash.
The hardest part of this process is admitting that you won't be trying to keep up with the Jones family regarding your primary residence over the next six years. Instead, you'll buy "rental" residential properties, live in older properties, and do all of this within your means. But at the end of the adventure, you'll be an authentic real estate entrepreneur with a portfolio of income-generating properties that will support you and your family for years.
