Last Updated on March 29, 2023 by Mark Ferguson
I strongly believe that real estate is one of the best ways to achieve wealth. Rental properties, in particular, are an awesome way to build net worth and create passive income.
I own a real estate brokerage, have been an agent for 17 years, and flip houses as well. My strategy is to make as much money as I can by selling houses as an agent or flipping houses and investing that money into rentals. Real estate has made me quite a bit more than a millionaire and anyone with a work ethic can do it. If you become a millionaire, it may not mean what it once did thanks to inflation and the cost of living. However, being a millionaire is still a big deal, and only 5 percent of American households have a net worth of one million dollars or more.
Why is real estate a great way to become a millionaire?
Real estate is one of the best ways to build wealth with or without a lot of money. I am not saying you don’t need any money or that it is easy, but it is possible. One of the main reasons real estate is a great vehicle for wealth is the ability to use leverage. Leverage is basically using loans or other people’s money. You can get loans relatively easy on real estate because it is a hard asset. The more money you have the easier it is to make money in real estate. While it is possible to get started with nothing or next to nothing, it is much easier if you have money to invest.
While you can borrow money to invest in other businesses, it is usually not as easy as it is to borrow against real estate. Banks love to lend on houses and commercial properties because they have an asset backing the loan. If banks lend on stocks or businesses and they go under the bank has nothing. If they loan against a house and the borrower can’t make payments the bank can take the house.
Because banks like to lend on real estate you can get some of the best loan terms available. Real estate also has amazing tax advantages that are not available with other investments. You can buy and sell a primary house, make $200,000 and pay zero taxes on that profit in certain scenarios. Not tax-deferred, no tax at all, ever. You can also force appreciation with real estate; you do not have wait for it to go up in value. I flipped 26 houses last year and all of them I bought for much less than they were actually worth. You can also make improvements to a property to increase the value. All of this can occur while you are making money on it every month after paying expenses including the mortgage.
It is also possible to take money out of your real estate investments by refinancing properties. You can use that money to buy more and more properties. This is what I have done in my career and one of my only regrets is that I did not start sooner!
Is a primary house an investment?
I want to start with the question of whether a primary residence is an investment. Many people talk about how it is dumb to buy a house and smart investors rent. I disagree. I think a primary residence can build a lot of wealth. I have increased my net worth buying and selling houses that I lived in over and over.
I bought my first house when I was 22 years old. I paid $190,000 for the house, which was full retail value for it. I lived there for 7 years and spent at least $10,000 on materials to remodel the home. That money does not count the time I personally spent updating bathrooms, painting, installing fixtures and fixing many other small things. I sold the house for $180,000 after doing all that work! It did not help that the market dropped, but I could have done much better if I would have been patient and waited for an awesome deal. Not every personal house is a great investment but I also did not have to pay rent, I was not forced to move when the landlord decided he wanted to sell, I could have pets, and I could change the houses however I saw fit. I did much better financially with my second house.
I bought my second house from the foreclosure sale for $215,000 in 2009, put less money into it for repairs, and sold it for $343,000 three years later. I bought the house with money I borrowed from my sister and father in law because I had to pay cash at the foreclosure sale. I was able to refinance all of that money out with a conventional bank a couple of months later. The awesome part about making so much money on that house was that it was tax-free. When you live in a house for 2 out of the last 5 years the money you make is usually tax-free! I sold the house to my friend so I had no real estate commissions to pay. We spent less than $10,000 on the house while we owned it and we did not even have to change the carpet.
I took the money I made from that house and used it for a down payment on a house I purchased for $560,000 in 2013. I have owned that house since and it is worth more than $850,000 now. I was lucky that our market has taken off, but I also focus on getting great deals on all the houses I buy. My loan on my personal house is less than $400,000, which means I have created $450,000 in net worth through my personal residences. that money is tax-free if I ever decide to sell the house I am in now. They limit your tax-free gain to $250,000 for an individual or $500,000 for a couple. I can also get a line of credit or refinance the house to pull money out tax-free and use it to invest.
I have not become a millionaire through these houses, but they have definitely helped to grow my net worth. When you buy a house as an owner occupant you can put very little money down. Because you are putting little money into the deal, the returns can huge if you got a great deal or values increase. If you do not have a lot of money to invest in rental properties, buying a personal residence is a great way to start. When you gain equity in the house or buy below market value, you can get a line of credit, pull any money you invested out plus some and use that money to invest. I bought my first rental property by refinancing the second primary house I had.
Why are rentals a great source of wealth?
The biggest increase to my net worth came from rental properties. I always buy properties below market value, which creates instant equity. When I buy a rental property for $120,000, it may be worth $160,000 or more after spending $15,000 to fix it up. When I buy that property and fix it up, I add $25,000 to my net worth. I have 20 rental properties nowand all of them have added money to my net worth in multiple ways:
Buy below market value
You can buy below market value in many different ways. You do not have to be a professional investor to do it. There are deals on the MLS, on auctions, and even on Facebook! Buying below market value allows investors to use the BRRRR strategy which in turn can get you into rentals with very little money. Every house I buy adds $20,000 to $50,000 to my net worth because of the great deals I get.
Appreciation
I never count on appreciation but it is a nice bonus. I buy rentals that will make money today without prices increasing. However, my rentals have seen huge increases in prices. I started buying rentals in 2010 and spent about $1.3 million on 13 residential properties ( I also have commercial). Those rentals are worth over $3 million dollars today. Part of that is appreciation and part of it buying below market. The cool part is I spent very little money buying them after refinancing a few.
Cash flow
My rentals make me about $12,000 a month in passive income every month. I have property management who takes care of them for me and it takes very little work once I buy and renovate the property if needed. That money will keep coming in as long as I own the properties and will increase over time as rents go up with inflation. I love rentals because of the steady money they bring in.
Equity pay down
I have mortgages on all of my properties and my tenants are slowly paying them off for me. Every month my net worth increases because the mortgage balances on my properties decrease. This is on top of the cash flow I make every month.
All of these factors have increased my net worth directly or given me more cash, which allowed me to invest in more properties and add to my net worth. Rentals did not make me a millionaire overnight, but they have been an awesome investment and made me a millionaire a few years after I started buying them. Making a lot of income is great, but people can make hundreds of thousands of dollars a year with nothing to show for it if they spend it all.
How can you make money flipping houses?
One way I make a high income is by flipping houses. I flipped 93 houses in the last five years but started doing one or two a year with my father many years ago. Flipping houses is not as glamorous as they make it out to be on TV, but it can be a lot of fun as well as lucrative. I typically buy a house for $150,000 to $250,000, spend $20,000 to $50,000 fixing it up, spend another $20,000 to $30,000 on other costs, and sell for $250,000 to $350,000. We try to make $30,000 on each flip we do. Sometimes we do and sometimes we don’t.
I have used the money I make from flipping to buy more rentals and buy more and more flips every year. I would love to have more rentals but it is actually harder to find good rentals than good flips!
Below is a video of one of my flips.
How much money can you make being a real estate agent?
I have also made very good money being a real estate agent. I use to be an REO and HUD broker which meant I sold foreclosures for banks. I had multiple years that I made well over $100,000 a year after expenses from being an agent. I now own my own real estate brokerage but focus on the flips more than selling houses.
Not only is being an agent a great way to earn income that you can invest, but it is a game changer for my flipping and rental property businesses. I am able to find more deals and pay less in commissions because I am an agent.
How long did it take me to accumulate one million dollars in net worth?
I bought myfirst rental property at the end of 2010 when I figure my net worth was about $180,000. I had been a real estate agent for 8 years, and flipping houses with my father for many years, but had not accumulated a huge amount of money. I invested money in the stock market, but most of my net worth was in my personal house.
I hit one million dollars in net worth in 2013. At the time I had seven rental properties, which had contributed greatly to my net worth. Not only did buying below market value, and appreciation increase my net worth, but I was saving as much money as I could to buy rentals. I put 20 or 25 percent down on each property and made repairs to most of them. Here is what a typical rental looked like:
- Buy for $100,000
- Put down $20,000
- Spend $15,000 on repairs
- When I was done the house was worth $150,000 to $160,000
After buying and fixing up the rental I had a house that was worth $160,000 with a loan that was $80,000. After a couple of years that house increased to $180,000 in value and my loan balance decreased to about $77,000. For each of my rentals, I gained $100,000 or more of net worth after a few years of ownership. On some of my houses, I built much more net worth because I got really great deals on the property. That does not count the cash flow I earned each month, which was about $500 per month, per property.
Some of my net worth was from my personal residence and other investments, but most of it was from rentals. It took me about four years to accumulate a net worth of one million dollars from just rentals. While it took cash to buy those properties, it forced me to save money as well. I know I would not have saved as much had I not been buying rentals.
What if you don’t make a lot of money?
My story may not be relative to many people. I have a successful real estate sales team, a successful fix and flipping business, and a blog that makes money as well. I have had extra money to invest in rentals to increase my net worth. Even if you don’t have a lot of cash to invest, you can buy real estate. You can buy houses with little money down as an owner occupant, and with many other strategies. You could turn owner-occupied houses into rentals or sell them, collect tax-free profits, and re-invest it into more properties.
You may not be able to buy as many rentals as I did as fast, but you can definitely start building wealth. How fast it takes you to reach one million dollars in net worth depends on many factors like:
- How much cash you have to invest
- How good of a deal you get
- How many houses you buy
- How fast your market appreciates or possibly depreciates
- What strategies you use you to accelerate growth like refinancing, house hacking, or the BRRRR method.
Conclusion
It is possible to build a net worth of one million dollars in a couple of years with real estate. It also may take five years, ten years, or even fifteen years. Only five percent of households are millionaires so even if it takes a while you will be ahead of the pack. It may be tough to get your first property, but the more you buy the easier it gets and the more money you will make.
