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How I Used Real Estate to Become a Millionaire By 40

“90% of millionaires got their wealth by investing in real estate.”

-Andrew Carnegie

I saw this quote years ago… sure, it was motivating and reassured me that I was on the right path with my decision to focus on real estate. On the other hand, it’s pretty useless because it doesn’t explain how to invest in real estate to become a millionaire. Plus, Andrew Carnegie died over 100 years ago so what the hell does he know about investing, let alone real estate investing, in today’s world?

Well, I am 37 and my net worth crossed a million dollars a couple of years ago. I don’t say this to brag (okay, maybe a little), but I personally used real estate to become a millionaire and want to share how I got there so others can join me in this not-so-exclusive club—screw you, crypto bros! Here are the main investment strategies I used (I will go into much greater detail about each of these in future posts).

Forced Savings: Your Primary Residence

There are a number of gurus out there who say that you should rent instead of buying the home you live in. The idea is to keep the savings from renting and invest it. It sounds great in theory, but that will never work for someone like me.

You see, l have never been good at budgeting or tracking my finances. In fact, I have never bothered to sit down to figure out all my recurring monthly expenses or consistently reviewed my net worth (I actually didn’t even know I crossed the million dollar mark until I had a CPA audit my records) despite the fact that every personal finance book I’ve read and advisor I’ve met says this is a must.

You Do You, Boo Boo

I work hard to enjoy life, and I love going out to eat, traveling, gambling, and buying stupid stuff. Budgets are for losers! I decide how much I can spend by looking at how much cash I have. The more I see in my bank account, the easier it is for me to justify spending recklessly. On the other hand, when I see my funds getting short, I tighten up fast.

Owning my home forced me to put money “aside” every month via my mortgage payments. Every month, I’m gaining equity on my home due to the principal paydown on my loan. To me, it feels like that money is a sunk cost so I never consider using it. It’s like a one-way savings account–I’m not going to sell my house or tap into my equity by refinancing the property or putting a second mortgage on it just to fund a Hawaii trip or bet on the Super Bowl.

Ultimately, I agree with the gurus that your primary home is not an investment (any “investment” you have to pay a large chunk of your income every month to maintain is a liability, not an investment). But if you’re like me, and have difficulty saving money, owning your primary residence is a great way to build up your net worth. It’s no surprise that the average net worth of homeowners is significantly higher than those of renters.

Real-Life Monopoly: Becoming a Landlord

I was an “accidental landlord” when I first jumped into the world of rental properties. After just two years of owning my first home, I took a new job over an hour away. There was no way I was going to sit in SoCal traffic every day so I knew I was going to buy a place closer to my new job. But, I still had to decide whether to keep my first property and rent it out or sell it. I fought the temptation to use the equity I built up to buy a nicer place, and ultimately kept my place to rent. This was probably the best decision of my investing career.

Own It All, Baby!!!

The property didn’t make me a bunch of money or anything… in reality, it was a terrible rental. The monthly rent didn’t cover my mortgage so I paid hundreds of dollars each month for the privilege of having someone else live in my home. My property manager was awful and cost me thousands of dollars in repairs even though it was a new-construction home and a lot of the repairs should have cost me nothing under the builder’s warranty. To top things off, I had to pay this idiot 10% of my monthly rent for his crappy work!

Nevertheless, this experience pushed me to learn how to invest in rental properties the right way. I spent hours Googling the best ways to evaluate investments. I learned how to properly vet property managers and tenants. I discovered the difference between appreciation markets and cash flow markets (more on that below) and formulate a sound investment strategy. And most importantly, it ignited my passion for real estate (up to that point it was just a theoretical dream based on reading Rich Dad, Poor Dad). Simply put, this “investment” is what started me on my investment journey. Plus, it appreciated enough that I sold it for a good profit and had my seed money to start investing… all’s well that ends well!

Diversity: Investing in Income AND Appreciation Properties

Income properties produce a monthly surplus (known as “cash flow”) after paying off all expenses like mortgage(s), repairs, capital expenditures, property management fees, and vacancies. Income properties generally see little to no increase in value (“appreciation”). On the other hand, appreciation properties may have negative or break-even cash flow, but, usually, increase in value over time.

The vast majority of real estate podcasts and forums focus on income and cash flow and view it as the end-all-be-all in real estate investing. The common sentiment is that appreciation investments are speculative and too risky. They say “whether a deal is a good one is determined at the time of purchase, not the sale.” I call B.S. and I like to have my cake and eat it too so I invest in both.

Why Not Walk Both Paths?

The benefits of an income property are obvious: you collect a monthly check and don’t need to keep putting money into the property as long as you screen well for tenants and save a portion of the rent to cover property taxes, future repairs, and upgrades. The downside is that rents increase at a snail’s pace and, in some states and cities, are capped by law so the return on the money you have in the deal (known as “cash-on-cash return”) is relatively low and stagnates. I average about 10-20% annually on my income properties.

In contrast, some of my appreciation properties have doubled in value within years of buying them. Since I have loans on most of my properties, the cash-on-cash return on these properties is insane. For example, let’s say I purchase a property for $500k with 20% down so I initially have $100k in the deal. Now, let’s say the property value doubles in 5 years… that is 5x on the cash I have in the deal. If you want to nit-pick, it’s going to be less because I have closing costs and probably had to come out-of-pocket to pay some or all of my mortgage, repairs, taxes, or maybe all three (who really cares when we’re talking these monster numbers). I can’t calculate the annualized return, IRR, or any other ROI percentage. That crap is for nerds! But, I know for damn sure that I will take these deals all day!

These are home-run deals and you need to get lucky with the market timing (that’s why they’re speculative) but I’m a Cali-kid old man, born and raised, and it’s not all that uncommon out here (it’s happened at least twice in the last 20 years). Notably, appreciation markets tend to be the more expensive markets The median price for the appreciation markets I invest in is about 10x the median price for the income markets I invest in. So it takes a lot more money to invest in appreciation. Further, the risk with this strategy is that you will buy at the top of the market and prices go down. But, as long as you can weather the storm and hold on to the property, the market has always come back in the past. I’m willing to bet it’s going to keep doing so in the future.

I like to invest in appreciation and income markets. I’ve made the bulk of my net worth through heavy appreciation. At the same time, my income properties have helped me offset the negative cash flow in my appreciation properties. It’s all about balance! Eventually, I want all income assets where the monthly cash flow covers all of my monthly expenses but, for now, this mixed strategy has served me well.

Real Estate Gymnastics: Flipping

Flipping is probably the most widely-recognized form of real estate investing… and most inaccurately glamorized. Don’t get me wrong, it’s fun taking a junk property and redesigning it to make it beautiful with your own touches. However, flips have given me the most headaches of any investment, by a wide margin.

First of all, you need to look at a bunch of properties before you find a good deal. The best deals are usually abandoned homes and often have squatters. No matter how much courage you have (mine’s on the lower end of the spectrum), it’s never fun walking through homes like this not knowing if someone is hiding around the corner:

Abandoned Home With Squatters Living Inside

Second, you have to rely on a bunch of other people to make your project successful. You need wholesalers or agents to find you good deals. Hard-money lenders need to view and value the project the same way as you. Contractors need to stay on time and under budget. That’s a lot of moving pieces that have to go right. If one or more of these prongs don’t work out, you will have no deal or a losing one. I hate not having control over my destiny.

Third, flips are short-term projects (usually between 3 to 6 months) so you are much more susceptible to market changes. For example, my company took on a flip at the height of the COVID run-up. Our rehab only took two months but, by the time we listed it, the market already turned, interest rates shot up, and buyers fled the market. We were sitting on a loss and had to turn it into a rental we didn’t want. We still have hundreds of thousands of dollars tied up in that property. That’s money we can’t use to pick up other projects. Notably, we are lucky to have enough funds to sit on this property. Many flippers don’t have enough capital reserves to wait out the down market.

Flips aren’t all that profitable either. There are some home-run projects that make you a ton of money, but those are few and far between. It’s really more of a volume game where you try to hit a bunch of singles and doubles, which only adds to the risk. Worst of all, there’s no recurring income. It is only a one-time capital event when you sell so you have to keep doing it over and over again. It’s very hands-on and there’s nothing passive about it.

Heigh-Ho, Heigh-Ho, It’s Off to Work We Go: Jobs in Real Estate

Okay, this isn’t real estate investment and I invest in real estate specifically so I don’t have to work a traditional job. Nonetheless, I’ve made a good amount of money and funded a lot of deals working in the industry so I can’t leave this out.

I’ve worked as a commercial finance attorney (drafting and negotiating loan documents) and a residential Realtor. Neither job was very exciting or fulfilling, but both jobs gave me so much knowledge and experience that I wouldn’t change a thing (except for not leaving earlier!). Consistently being around real estate transactions gave me the confidence to dive head-first into the investment world. I can honestly say that it probably would have taken me much longer to pull the trigger or may have never done it without this level of comfort.

Now, I would never recommend getting a law degree just to get experience as a real estate attorney (it sucks working in the law and with most lawyers!). But, there are so many other options. Loan brokers, originators, and coordinators know the numbers and finance part of the deal incredibly well. Agents know how to value properties and estimate after-repair values and rental rates. Transaction coordinators are intimately familiar with the documents and disclosures that are required to close a deal. Escrow officers and title officers know everything about county recording requirements and title issues. Most of these jobs require some kind of training and/or licensing so you have to invest some time and money to get into these roles. But, the knowledge you gain working in the industry is well worth it. Just make sure you don’t hate it!

Curtain Call: Final Thoughts

It’s important to remember that this isn’t meant to be a step-by-step guide. The real estate market and the greater economy are constantly changing so what worked for me in the past may not work today. At the end of the day, it takes a lot of work, patience, luck, and heartbreaks to reach your goals. If it were easy, everyone would do it. But, I am confident that if you have the right mindset, work ethic, and risk tolerance, there is no reason why you can’t make millions through real estate.

Thanks for reading!

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