How to Become a Millionaire Through Real Estate (Beginners)

Dave:
This is how you become a millionaire through real estate investing. You can completely replace your income and achieve a seven figure net worth in a relatively short amount of time by buying rental properties no matter how much money you make or where you’re starting from. Today I’m going to show you how to get from your current financial situation to at least 1 million. Hey everyone, it’s Dave head of Real Estate Investing at BiggerPockets, and you’ve probably already heard this, that real estate offers the best path to financial freedom of any asset class, but how does that actually happen? How do you actually become a millionaire through real estate and replace the income from your current job? Today we’re going to discover just this. First, we’re going to start by talking about the four core wealth building elements you need in your real estate portfolio and how to optimize each one because building wealth in four different ways at the same time is really unique to real estate.

Dave:
You don’t get all of these benefits from stocks or from crypto or really from any other assets. So after we talk about those four key wealth building elements, we’re going to move in the middle of this video to talk about the actual math of how you can take your current income and starting capital and grow it to $1 million by using these real estate wealth generators. And this stuff that I’m going to show you, it’s simple math, but it’s also important to note it’s not just theory. It’s a real path. I’ve personally followed this for 15 years and the numbers prove it out. And then towards the end of the video I’ll also show you two additional growth levers that you can pull in your real estate investing to increase the velocity of compounding and your wealth. These two things are going to be really useful to everyone, even advanced investors out there who already understand the basics but maybe want to achieve their financial goals faster.

Dave:
So let’s get into it. Alright, so let’s start with these four basic building blocks that really every real estate investor and every real estate portfolio is built on top of you. And again, I’ll share two extra bonuses later, but let’s start with the really important four things. They are cashflow, appreciation, amortization, which you may hear called loan paydown, same thing and taxes. Those are the four core things that you need to remember, cashflow, appreciation, amortization, and taxes. So let’s go one by one and just define and talk about what each of these four growth levers are. The first is cashflow, and you’ve probably heard this term, maybe the whole reason you’re listening to this podcast. The whole reason you’re interested in real estate investing in the first place is cashflow, and it’s a really important part of being a real estate investor, the thing that eventually helps you quit your job to replace your income.

Dave:
The literal definition cashflow is basically you take all the revenue that you generate from a property or your entire portfolio, you subtract all of your expenses and I mean all of them, not just the mortgage and interest, but things like your repairs, your vacancy, your turnover costs, you subtract all of that and what you have leftover is your cashflow. If you own a rental property, and let’s just say that you generate $3,000 a month in revenue and it’s $2,500 in expenses, you make 500 bucks a month in cashflow. This is an amazing wealth builder in real estate and again, one of the main reasons people get into real estate in the first place because the cashflow building potential for real estate is way better than other asset classes. You don’t get the same cashflow potential with the stock market or crypto or anything like that.

Dave:
Real estate really is in my opinion, the best way to generate cashflow of really anything you can invest in. So that’s the first growth driver. The second one is appreciation. You probably know this, but generally speaking, housing prices go up in the United States and by owning these assets when you see real estate and property values go up, you make money off of that. If a property goes from $200,000 to $205,000 and you own that property, you just made $5,000. And so that is a very valuable, really sort of long-term reliable wealth building force in real estate investing. So so far our first two are cashflow and appreciation. The third one is a little less obvious than the first two. It’s something called amortization. You may hear this called loan pay down as well, but the basic idea is that most people who buy real estate buy it with a loan, they take out a mortgage and you have to pay that mortgage back.

Dave:
And if you’re just a normal homeowner, you’re taking your salary and your ordinary income and paying it back. But if you are a rental property owner, for example, the money that you use to pay down that loan is rent. So it’s not necessarily your money, it’s a business expense, like you have to pay it out from your revenue, but you actually get it back by paying down your loan. And how much this generates for you depends on the size of your loan and your interest rate, but it can add usually my ballpark is two to 4% annual return just from this. That’s pretty amazing, right? That’s as good as a bond or your savings account. And this is just this underappreciated, basically never talked about part of owning rental properties that can offer you a really great return and is one of the core builders of wealth from being a real estate investor.

Dave:
So those are the first three, cashflow, appreciation and amortization. The fourth one is another one people really sleep on, which is tax benefits. It took me a while to truly appreciate the tax benefits that you get as a real estate investor. The tax code in the United States really favors home ownership and property ownership and that basically just means in short run, if you earn, let’s just say a thousand bucks in real estate versus a thousand bucks from your job, you are going to keep more of that money that comes from buying in real estate. And I can get into all these details. We have plenty of other videos about that, but that is generally just true whether you’re taking advantage of capital gains depreciation, 10 31 exchange, there’s tons of different tax advantages that real estate investors can enjoy. And that just means when you earn that cashflow, when you get that appreciation, when you earn that amortization, you get to keep more of them.

Dave:
And that’s what’s so cool about real estate is these four things actually work together to build wealth for you. Your cashflow gives you money each and every month that you can either reinvest or you can choose to live off. Most people reinvest at the beginning of their career and then eventually live off their cashflow. And then you get appreciation and amortization, which build equity, which is long-term wealth creation that you can reinvest and gives you a really stable foundation for your net worth. And then the tax benefits lets you keep more of those gains that you earn through cashflow appreciation, amortization. And this is why I was saying at the beginning of the video why real estate investing is such a good way to pursue financial freedom is because it’s the only asset class that does this. No other thing that you can invest in gives you this combination of wealth building that real estate investing does. So those are our four wealth building cores that I am now going to show you an example of how you can actually buy a property and turn these four ideas into a million dollars or more. But first we have to take a quick break. We’ll be right back. This week’s bigger news is brought to you by the Fundrise Flagship Fund, invest in private market real estate with the Fundrise Flagship fund. Check out fundrise.com/pockets to learn more.

Dave:
Welcome back to the BiggerPockets podcast. We are talking today about how to become a millionaire through real estate investing. Before the break, we talked about the four key wealth drivers, which as a reminder are cashflow, appreciation, amortization, and tax benefits. And I know that probably all sounds good, but you’re wondering how do I actually do this? How do I take these sort of theoretical ideas and turn them into properties that make me a millionaire? Well, I’m going to give you an example here to showcase exactly how you can do just this. Alright, let’s start by imagining that you’re buying a house. Let’s see if I can draw a house here and for anyone who’s listening, I am just going to write this out on a whiteboard on YouTube, so you might want to check that out. Here’s my really ugly looking house everyone. I’m going to throw in a little windows here, but let’s just say that we’re going to buy a property for $300,000 that’s lower than the average, but that’s a nice sweet spot for investing days.

Dave:
If you can find a property for $300,000, you usually have a pretty good chance that you’re going to be able to make it generate cashflow. And of that $300,000, we’re going to put down 25%, right? So that means our down payment is going to come out to $75,000. So for the purposes of this example, that’s going to be our investment. If you were actually making this investment, you’re going to need some other costs. There’s going to be some closing costs, you’re going to need some cash reserves, but I want to just keep this example simple here. Use nice round numbers. So we’re going to say that our investment for our purposes today is $75,000. Now let’s go through how this $75,000 investment actually translates into wealth building in the form of cashflow, appreciation, amortization, and tax benefits. Let’s go one by one. So first up, let’s talk about cashflow and how this all translates.

Dave:
Using our example, let’s assume that we are going to generate $2,800 in rent per month for this property. So this is not quite the 1% rule if you’re familiar with that, but it’s close, which means that we have a good chance of cash flowing, and I’m not going to get into every single expense today. We have plenty of other videos on BiggerPockets that you can check out to do that, but let’s just say that we’re going to generate our rent of 2,800 bucks and our expenses all in when we factor in all of it is $2,500. So what we need to do is subtract that $2,500 of expenses and that gets us our cashflow. This is easy. So we know that we’re making $300 per month in cashflow, so that’s actually already pretty good, right? You’re earning about $3,600 per year off your $75,000 investment.

Dave:
But obviously as we’ve been talking about, cashflow is just one of the four wealth drivers and we need to talk about appreciation next. So with appreciation, we’ve seen sort of these crazy appreciation rates in real estate over the last couple of years that is not normal, but it is normal for home prices to go up to three 4% in an average year. The long-term average is about 3%. So I’m just going to say that our property price is going to go up 3% per year, and so that first year, remember we bought it for 300,000, and so if you multiply 300,000 by 1.03, if it grows by 3%, that means that our property value after the first year is going to be $309,000, meaning we just made $9,000 in profit. All of that appreciation just goes straight into your net worth. Now you can’t access it immediately.

Dave:
It’s not like cashflow that’s getting paid out to you every month, and we’ll talk about that in a little bit, but that is $9,000 in net worth that you just earned from appreciation alone. Next up comes amortization, which again is the same thing as loan pay down. Basically for this style loan, if you took out a $225,000 loan, because remember we bought it for 300 grand, but we put down 75 grand, we would earn about $2,500. I’m rounding a little bit, but it was about $2,500 in loan. So hopefully you’re keeping track of this, right? So from the three main wealth drivers that we’ve talked about so far actually for cashflow is about $3,600 per year. Then we had $9,000 from appreciation and $2,500 from amortization. So the total net that we’re earning here actually comes out to roughly, and again, I’m rounding a little bit $14,100 in just that first year.

Dave:
Now you’re probably thinking those are only three of the wealth drivers. What about taxes? Now, taxes are interesting because it doesn’t actually make you money, but depending on some details, I did a little back of the envelope math. Depending on your tax bracket, how you want to go about your tax strategy, you’re basically going to keep in your pocket an extra 750 to $1,200 a year. So I’m actually just going to put in another thousand dollars just that’s kind of the average in tax savings. So your overall net benefit is about $15,000. So hopefully you see how amazing this is, right? You’re talking about one property where you invested $75,000 and now you are earning $15,000. This is pretty simple math, right? We could do this one in our head that equals a 20% ROI in year one, which is incredible. The average for the stock market is 8%.

Dave:
So we’re talking about the first year of your investment property already earning you more than double the ROI of the stock market because we’re combining these four different wealth pillars that are so unique to real estate investing. Now, before we move on, I think there’s a couple of things that we need to talk about. First, $15,000 is not a million dollars. So how do you actually scale this to get to enough properties and enough real estate where your net worth exceeds $1 million? I’ll share with you two additional thoughts. The first principle that you need to remember is that the first year of owning real estate is usually the worst year that you have, right? Because rents tend to go up and so I’m just going to use round numbers, but let’s just imagine that in year two, our cashflow goes from $3,600 per year to $4,000 a year.

Dave:
That is a pretty realistic growth rate for rent. That’s what normally happens. Now for appreciation, we’re going to just go up 3% again, but 3% of $309,000 is more than 3% of $300,000. So instead of $9,000 of we have $9,270 of appreciation next amortization, this one actually goes up each and every year as well. This is just the way that bank loans work the first year. They take a lot of interest, they don’t let you pay down that principle, but over time you start to gain an advantage. And so going from $2,500, it goes slowly. So let’s just say it’s $2,600, tax benefits will still be about a thousand dollars. Even in that second year, that won’t change that much. So that’s 16,870 here as our total. Now that’s not crazy. That’s not going to change your life. But look, the difference between the first year, which was $15,000 and the second year is nearly $17,000, and again, this is just on one property and if we extrapolate this out, this is why I say you can replace your income in eight to 12 years because this is just one year out.

Dave:
In the next year, it’s probably going to go to 19,000 and then it’ll go to 22,000 and then it’ll go to 25,000. And so that’s the principle to remember here about how real estate helps you become a millionaire. You make an amazing 20% ROI in year one, and then you make an even better ROI in year two, you make an even better ROI in year three and scale from there. Now of course, even if you scale out just one property, this isn’t going to be enough. And so the next thing you need to do is acquire more property. So you bought this first house in year one for $300,000, right? And over time, that is going to build up enough equity and hopefully you’re still saving some money where you can buy a second house. And so maybe that takes two years. Let’s just say it takes two years for you to build up this $31,000 that you’re getting from your existing rental property.

Dave:
Maybe you’re able to save some money per year and you buy another second house two years later for $250,000 and then another two years. Let’s just say you buy another house, my house on drawing are just getting worse and worse. Let’s say this one’s for $350,000, and yes, that will take you five years. You buy one, then wait two years, then wait two years, four or five years. But now you own three rental properties and instead of making 15, $17,000 a year, you’re on year five of that first investment. You’re on year two or three of that second investment and you’re still making money off that first investment. Now you’re maybe making 60 grand per year in just your fourth year. And this point is really where things start to accelerate because if you’re making 50, 60, 70 grand a year, now you can start buying them every year, right?

Dave:
It’s one year after this that you can reinvest and maybe buy another house worth 300 grand and then one more year and then you buy one maybe worth three 50. Prices are going up. I don’t know exactly. I’m just trying to show you that you can take the money from your initial investment, and yes, this assumes that you’re saving money and reinvesting a hundred percent of your profits, but if you do this for I estimate eight to 12 years, you can completely replace your income. And I’ve actually done the math on this using real deals right now, your current cash on cash return. But you can typically, if you follow this pattern, you take advantage of cashflow, appreciation, amortization, and continuously reinvest into your real estate portfolio. You can replace almost all if not all of your income in eight to 12 years. And the eight to 12 will depend on how aggressive you are, how successful your deals are, how much work you’re willing to put into each deal.

Dave:
But this is the timeline for replacing your income. And to me that is as exciting as it gets. The average career in the US is like 45 years saying that you can replace your income in eight to 12. That is super exciting. I think it’s just a perfect example of why real estate is the best path to financial freedom. And I know this might sound sort of like pie in the sky. Of course, it’s so easy. Just buy a house every two years. I know it’s hard, right? The real hard part is saving for that first property because in this example I just assumed you had $75,000 to invest. That’s a ton of money obviously, and you might need to save for a while for that. You might need to partner with some people to be able to get that. But the point of this exercise and this example is that once you get the first one, it really starts to accelerate.

Dave:
Even if it takes you three years to save up that 75 grand or more, the amount of time it will take you to save up for that next one is less because your real estate is now contributing to your savings. And yeah, maybe it takes three years to save for that second property. I said two here, but I’m just generalizing. But then maybe for the third property, it goes down to two years and then it goes down to one year, and then eventually maybe you can buy them every six months. And you don’t need to do this forever. This isn’t like something you need to do for the rest of your life. For most people, if you can buy 10 units, 15 units, 20 units, you’re going to be able to replace your income, become a millionaire, and be financially free. The key here to remember is compounding, right?

Dave:
Einstein called it the eighth wonder of the world, and there is a reason for that. If you take your money, your earned hard saved money and invest it into an appreciating asset like real estate, and you continuously reinvest, if you do that for a long time, it is really hard to miss. It is course possible, but you have a very, very, very good chance of replacing your income and becoming financially independent if you just follow this really simple path to taking advantage of the four wealth builders of real estate, reinvesting all of your profits and doing it for eight to 12 years. That’s it. So that’s the basic building blocks of becoming a millionaire through real estate investing. But I actually have two bonus topics I want to share with you as well, which we’ll get to right after this quick break.

Dave:
Welcome back to the BiggerPockets podcast. We’re talking the basic building blocks of financial freedom and how you can become a millionaire through real estate investing. Before the break, I showed an example of how you can use our four key wealth builders of cashflow, appreciation, amortization, and tax benefits. And if you do that for long enough, if you compound your returns, if you stack properties over eight to 12 years, you can become a millionaire and you can replace your income. Now, I said before that sort of this difference between eight to 12 years will depend on what kind of deals you do, how successful they are, and there are two sort of concepts I want to help everyone understand that can help you accelerate that timeline, maybe move you closer to eight years, maybe even faster, honestly, if you’re super aggressive about it. And those two other concepts are value add and leverage.

Dave:
So let’s talk about each of them. We’re going to start with value add, and sometimes you may hear this called forced appreciation, and there are other real estate educators who loop this in with appreciation like the one we were talking about earlier as one of our four key growth drivers. I actually think they’re pretty different. And even though people call them both appreciation, I think the way you generate them and the way you should think about them are almost entirely opposite. And so I like to separate them. Appreciation that we were talking about earlier is something I would categorize as market appreciation. That’s basically large macroeconomic forces that are entirely outside of your control, pushing up the value of homes. That’s just how the world works. Value add is the opposite. It is something that you do very deliberately. It is a business plan that you enact to increase the value of your home.

Dave:
So both sort of get you to the same place where the home is worth more than it used to be, but one is sort of random and not up to you, and the other one is something that you very deliberately do. So just as an example, a value add, right? This is something that you hear talk about with flipping, right? So let’s just assume that we’re going to flip a single family house and we’re going to buy it for, I don’t know, this is a cheap house. Let’s say it’s $150,000, but let’s say in this area where we bought it like a nice fixed up house, which we often call the arv, the after repair value, let’s just say it’s worth $400,000. So we’re buying a house that’s not in great shape for one 50. The A RV is $400,000, and let’s just imagine that we can renovate this property for let’s say it’s going to cost us a hundred grand, and there are other costs.

Dave:
We’re going to call these just holding costs. These are things like holding your loan, paying for insurance, paying taxes. These are things that you have to do even when you’re renovating a property. Let’s just say those come out to $50,000. So our expenses all in come out to $300,000. Remember, we paid one 50 for it. Then we have the renovation costs, we have our holding costs. Those are our expenses, but remember, we could sell it for $400,000. That’s our a RV. And so when you subtract these, that means in a hundred thousand dollars profit. Now of course I’m oversimplifying this. Value add is not the easiest thing to do. Renovating a home profitably does take some skill and some work. These are absolutely skills you can learn. If I can do these types of things, you can absolutely do them, but I just want to show you that people talk about these four wealth drivers of real estate.

Dave:
Those are kind of the plain vanilla. Just go buy a rental property that’s already in good condition. But if you want to do stuff like this, if you want to really accelerate your growth as a real estate investor, you can start doing value add. That can mean doing flips like the example here, but I think it’s really important to remember that value add doesn’t just work for flips. So this is a flip example, but you can do a rental example as well. Let’s just talk about that for a second. Let’s imagine you buy a property for $300,000 and the rents, let’s just say they’re kind of low, they’re $2,000 per month. What if we did a renovation? Let’s just say this is a modest renovation. It’s going to be $25,000. That’s a cosmetic rehab that could bring our value of our house hopefully up more than $25,000.

Dave:
So let’s just say that gets us to three 40. So right, we’ve just made $15,000. This is the goal of value add, right? You’re putting in 20 5K, but you’re netting more than that in value. So you drive up the cost of the home to $340,000 earning you 15 grand, but also you can raise your rents. Now, let’s just say from $2,000 to $2,400, again, I’m just making these up as an example, but what you can see here is not only did you make 15 grand plus 15 K, now you’re making $400 a month more, which is $4,800 per year in more cashflow. And so this is just another simple example of how you can really accelerate your timeline using value add, whether you’re flipping houses using rentals. I should also say this works for the bur method. This works for short-term rentals as well.

Dave:
Value add is a great thing to consider if you want to become a millionaire and reach financial freedom as fast as possible. The last thing I want to talk about is leverage. And this isn’t exactly a way you generate money, but it is a way that you get bigger returns in real estate than you do in a lot of other asset classes. And I want to caveat this by saying that leverage, which is just another word for using debt, it’s basically saying that you take out a mortgage or you take out a loan to finance your investing. Taking on leverage has its pros and cons. It does come with risk because when you are taking out a loan, you have an to pay that loan back, and if you don’t, you can get foreclosed on. You can face bankruptcy. It is really important for everyone to understand that there is risk in taking on debt, but I also want to show you why this can be an advantage in building your real estate investing portfolio.

Dave:
All right, so let’s go back to our original example from the beginning where we bought a house for 300 K and we said that was going to appreciate right at 3% per year. And let’s just imagine that we bought this house for cash. Most people can’t do this, but let’s just for the purposes of this example, let’s say we bought this house for cash and we’re earning $9,000 because remember, that means that the property’s worth 309 K and that equals a $9,000 profit for us in appreciation alone. That’s what happens if you buy it for cash. Now, if you buy it with a loan, you get the same nine k profit, but when you are buying it for cash, right? If you invest 300 K, your return is only a 3% return, right? That 9% comes out to 3%. But if instead you use leverage, right?

Dave:
If you put 25% down and finance the rest of it, remember what we said, you’re only putting down 70 5K, and I know that’s still a lot of money. I’m just saying compared to $300,000, it’s a lot less. And in this case, instead of earning a 3% return, you are still earning this nine k profit. But if you’re only investing 70 5K, this actually comes out to a 12% return. And I know this topic can be a little confusing. People are saying, oh, you’re earning nine k either way, and that is true, but it’s the efficiency with which you’re earning that return. That is so important because look, if you’re buying cash, you need 300 grand to invest to earn that nine k. If you’re using leverage, you need just 70 5K to earn the same amount. And if you are trying to grow and scale and become a millionaire, then you need to be efficient with your capital.

Dave:
Most people don’t have this 300 K to buy cash, and even if you did, you might not want to. And so you need to find ways to take the cash that you have and earn the best possible return. And leverage is a really powerful way to do that. Now, like I said, there are trade-offs with leverage, and the first one is risk, right? As I said, if things don’t go well with your property, if your tenants don’t pay, you still got to pay your mortgage. They are not giving you a break. If tenants aren’t paying, that doesn’t usually happen, but that is a risk that you need to consider if you’re going to take on a loan. So when we talk about leverage, yes, it is more efficient, but there is more risk. And the third implication here is less cashflow. That’s another thing that you need to remind yourself because if you’re buying a property for cash, your expenses every month are going to be, and that means you’re going to increase your cashflow, but it comes at the benefit of generating more equity more quickly.

Dave:
And so this is a question you as a real estate investor need to think about for yourself. For a lot of investors, they don’t think that much about it because they can’t afford to buy properties cash, and so they leverage everything. That’s most of us. That is for most people, for most of your career, as you get towards later in your career and you’ve built a lot of equity, you may choose to leverage less. You may choose to pay down some of your mortgages to not pull all the equity out of your properties to generate more cashflow. Ultimately, what’s going to allow you to retire off of your real estate? And so that’s just something as an investor you need to think about and change over time. But when you’re in growth mode, most people recommend taking on leverage. Not so much that you’re taking on unnecessary risk, but taking on enough leverage to be efficient without taking on so much leverage that you’re putting your property and your personal finances at risk.

Dave:
Alright? So that’s leverage. Just as a reminder, this is just a strategic thing that you can think about and how you might want to boost your acquisitions and your growth. It allows you to start with much less money and to grow more quickly without having to inject more capital, more of your savings. This, again, is pretty unique to real estate investing. You can get leverage in the stock market that’s super risky, but in real estate, there are very good, relatively safe risk adjusted ways to use debt and leverage to really build your own personal wealth and ultimately to become a millionaire. Alright, so those are the two additional bonuses. We’ve got value add, and we’ve got leverage to add to our four core growth pillars, which again are cashflow, amortization, appreciation, and tax benefits. So this is how you do it. Everyone consider these growth pillars and start putting them into action and start building your own real estate portfolio, and you too can realistically become a millionaire in just a couple of years.

Dave:
Now, one thing to remember is how you go about this and which growth levers you choose to pursue most aggressively is really up to you. For some people, let’s just say for investor one, they might be mostly focused on cashflow and value add, right? That’s a totally good way to pursue a career. For me, when I first started in real estate, I really focused on appreciation and leverage. I needed that, right? I also wanted cashflow, but it wasn’t the most important thing to me. I was trying to build my equity as quickly as possible so I can invest later. My investing now is a lot more focused on value add because I think it’s just a great way to make money in the short run. And because I have a more complicated portfolio, I really think about my tax advantages carefully for each deal that I do.

Dave:
And this is what’s going to happen for you. Think about what you can accomplish today, which growth levers you can take advantage of just to get your foot in the door and just to get started. Because if you can do that, you will be able to compound those returns. You’ll be able to stack your returns and really start building a portfolio. And you can always change them like I have, I’ve moved from appreciation to more of a value add investor, caring more about tax benefits, and that will happen for you too. But worry about that down the line. Think more carefully about what’s important for you today and get started. Get your foot in the game because that compounding that amount of time that you own these properties is really the single most important thing. So that is my advice to you. Figure out a way that you can take advantage of these levers and get started as soon as possible. Thank you all so much for listening to this episode of the BiggerPockets podcast. If you have any questions about this, please hit me up. If you’re watching this on YouTube, you can drop a comment below. You can always find me on biggerpockets.com or on Instagram where I’m at the data deli for BiggerPockets. I’m Dave Meyer. I’ll see you next time.