Building Wealth With Real Estate
For the first 7-8 years after I starting practicing, I was mainly focused on getting out from under $250K+ of student loan debt using Dave Ramsey’s 7 Baby Steps. I’ll admit that I didn’t follow his advice exactly as he teaches.
For my situation, I felt I could both pay down debt aggressively while also investing for our future which goes against his principle of becoming consumer debt-free BEFORE investing any extra money.
This particular method has worked for me and should work for most people that make an above average income but…. to each his own.
The more I listened to Dave’s show, the more I occasionally heard him mention that he loved real estate as an investment. But I never really thought much of it because, again, of his recommending that we should first focus on becoming debt-free.
At the time, I was heavily invested in index funds but wanted to learn more about investing in general.
The more books I read on the subject, the more I realized that the majority of millionaires owned real estate. So if most millionaires (and billionaires) owned real estate, and I wanted to continue to grow my wealth, maybe I should get into real estate too, right?
Just like the old saying goes, “If you can’t beat ’em then join ’em“.
So a few years ago I set out to look into different options to begin diversifying a certain percentage of our non-retirement holdings into real estate. Man, am I glad I did!
During this self-education process, I’ve been able to not only read some fantastic books on the subject but also meet some incredible people that are putting out fantastic content as well.
Some of those that I’ve met are:
- Joe Fairless – who focuses on apartment syndications. Joe has a great book on this subject called The Best Ever Apartment Syndication Book
- Michael Blank – also teaches about apartment building investing with a special focus on raising money. You can check out his new book, Financial Freedom With Real Estate Investing.
- Kenji and Leti – a husband and wife team over at Semiretired MD who offer both coaching and online courses teaching docs about real estate investing.
- Cherry Chen – is an internist in Dallas that runs The Real Estate Physician site. My wife and I had breakfast with her recently and she’s full of great ideas when it comes to real estate investing.
If you’re interested in building REAL wealth using real estate, it’s important to know all of the in’s and out’s that are available.
Depending on which route you choose, it could end up being a huge commitment which you may or may not be ready for at this stage of your career.
What Holds People Back?
I often ask nervous patients what causes them to be fearful of a surgical procedure. Many cite that it’s fear of the “unknown.“
This same “fear” also prevents us from reaching our true potential in life. Same thing can be said with real estate investing. The costs and skills that are needed with some of the different investments such as fix and flips can be daunting.
So it’s really important to understand what your options are before diving in head first. I recently heard a podcast where an investor started out doing fix and flips, a few years later he moved on to buying and selling foreclosures, then shifted to buying single family homes.
Sometimes it’ll take trying different things before knowing what works best for your situation.
A few of the questions you should be asking yourself are:
- What are the different types of real estate investments available?
- Is it really worth all the effort it takes?
- Is this type of investing reliable enough to be part of my retirement plan?
- What are other passive investing options instead?
- Do I want to continue working, trading my time for money, or invest in something that could provide true financial freedom in five years or less?
Again, this is not for everyone, but you’ll see some phenomenal results if you do it the right way.
Let’s get into the exact steps it’ll take to build wealth with real estate….
7 Steps To Building Wealth With Real Estate
1) Start with your “why”
The first place to start when it comes to building wealth with real estate is….drum roll please…You!
Just like Michael Jackson used to sing, “I’m starting with the Man in the mirror.”
Many times when we seek to make a positive change for ourselves (lose weight, meet new friends, become wealthy), it’s ourselves that hold us back.
Brandon Turner over at BiggerPockets, says that there are 3 things that you must change if you want to become wealthy.
He calls these 3 things “The Wealth Tripod“.
“All three steps are required if you want to build and maintain wealth. Like a camera tripod — if one of the legs is broken, the entire tripod will fall down.”
Here are the three legs of The Wealth Tripod
- You must believe wealth is actually possible for you.
- You must learn how wealth is built.
- You must live out the steps needed to make it happen.
The best book EVER written regarding building a “wealth building mindset” is Napoleon Hill’s “Think And Grow Rich“.
If you haven’t read it and are serious about building wealth, it’s a MUST read. Share it with your spouse and kids. It’s that good.
Ok, let’s get back to Step #1.
Do me a favor and get out a blank sheet of paper.
No, seriously, I really want you to do this quick exercise as it’s going to get you going in the right direction.
On the paper I want you to write down in as much detail, WHY you want to build wealth.
To get you started and hopefully motivated, I’ll tell you a quick story. Only a few short weeks ago, my oldest son who NEVER talks about money came up to me and said, “Dad, will you teach me about investments and real estate like you’re always reading and writing about some day?“
Listen, for those of you that have teenagers, we know that when they make it a point to put down their phones and ask us questions, we better listen. Who knows when they’ll come out of their shell again!
I’ll be honest with you, his question REALLY motivated me to continue learning and networking with people about real estate investing. What better “Why” can someone have than being able to pass it on to their kids.
Proverbs 13:22 – “A good person leaves an inheritance for their children’s children, but a sinner’s wealth is stored up for the righteous.”
So once you state your “Why” you want to really do this, then that should keep you motivated to continue doing what it takes to get involved even when things aren’t going the way you may want them to in the future.
Listen, I’ve had real estate deals that haven’t done as well as expected (think RealtyShares). That’s OK as long as you LEARN something from it and not make the same mistake(s) again. It’s going to happen. But your “Why” is going to help you get over some of those humps and push past your comfort zone to keep you on track.
2) Learn how wealth is built
If you “Google” the phrase “building wealth,” as of this writing, there are over 300 billion search results. That’s billion with a “B”.
This shows us that there’s no excuse why someone can’t find a resource out there that teaches how to build up a big pile of money. It ain’t rocket science.
It’s like anything else in life. If you want to get good at something then you simply:
- Study it
- Learn it
- Master it
This is why you’ll often hear highly successful people say, “The first million is the hardest.”
It reminds me of snow skiing. I first learned to ski on a church youth group trip in high school. My best friend Mike AKA “Gummer,” pulled me aside after the first day when he noticed that I wasn’t quite catching on in ski school. He brought me up to the top of the mountain in Monarch Colorado and taught me himself. Thanks Gummer!
Once I learned to ski, it clicked. After that trip, I didn’t ski again for over 20 years but picked it right back up because once you learn something, such as “making the first million,” you can then repeat it over and over again for the rest of your life.
After reading books, attending seminars and networking with wealthy people, I’ve come to realize that wealth is made in one of three categories:
If you’ve been an avid reader on this site, then you should be aware of the first two. In my opinion, if you really want to do it right, then focus on all three categories. But for today’s purposes, we’re going to continue focusing on #3, real estate.
Now that you know how wealth is built, let’s move on to step 3…
3) Must take action
How many times have you wanted to do something that you were excited about? What happened? Did you do it? If not, you probably started reading and learning about it but never did anything else with it because you didn’t take action.
I can “want” to learn how to improve my forehand in tennis by reading articles and watching YouTube videos ’til the cows come home.
But getting the “Federer Forehand,” like all us tennis players want, is not going to happen by itself.
Why? I’ve got to get on the court and take action. My forehand isn’t going to change to one like his by itself (even though I wish it could!).
The same thing rings true with building wealth with real estate. You can think you can do it, you can learn how to do it, but if you don’t take action, it’s not going to happen.
Nobody, not even the government, can help you.
As with anything else, “action” is the real key to finding success in whatever we go after in life. Without it, you have nothing.
It really doesn’t matter which of the three wealth building categories from Step #2 above you choose to pursue (or all three). Just make sure that you set aside a certain amount of time each week, or better yet each day, and take action.
4) Decide what type of real estate investor you want to be
Now that you have your “why” you are wanting to pursue investing in real estate and you know you must take action in order to continue moving forward, it’s time to decide on which route you want to take: Active vs Passive Real Estate Investing
Most active investors that I personally know that also have a “day job” typically have been involved in real estate in some form or fashion in the past. Usually their family has rental property and they already have some type of support for the day-to-day operations it takes to run a successful real estate business.
If you want to pursue the active real estate route, you need to have two things that we’ve already touched on:
Does your full time job and family obligations leave you enough spare time to be an active investor? If so, is this something that you’ve already been taught or have experience with?
Have you had a mentor show you what it takes to be successful in this business? If you’ve answered “no” to these questions then perhaps you’re better off passively investing.
The good news is that there’s multiple different ways to invest passively in real estate. For busy professionals such as ourselves, we want the benefit of an extra stream of income with the benefit of more time minus the headaches of managing properties ourselves.
For me, it’s a win-win situation.
For most of you, passive investing is going to make more sense in the long run.
5) Residential or commercial?
By now, you should’ve decided if you want to pursue either the passive or active route. For most of us, passive investing is the better option. Why? Because it makes more sense to go do what we’ve been trained to do instead of unclogging toilets in the middle of the night!
Here’s a perfect example of someone else that recommends this same line of thinking. One of the things I like about motivational speaker and real estate giant Grant Cardone is that he tells his audience to focus on what they do best and get really good at it BEFORE getting into real estate investing.
Now I realize that he maybe a bit flamboyant at times but he resonates with a lot of people. Many of his videos hit home with me. There have been controversies between who should we listen to, him or Dave Ramsey. I once heard that the difference between the two boils down to this:
Dave Ramsey’s message is for the masses while Grant Cardone’s is for entrepreneurs.
No matter who you end up listening to, there’s still too many people out there that want success but aren’t willing to work for it. But you did.
So for you, me, and many others, we should stick with what we know best whether it’s dentistry, medicine, tax law, or whatever our trade is.
We paid the price, put in the long hours, and didn’t party like our friends every weekend so we could achieve our goals.
Don’t give that up.
Now your next step is to decide (either in a passive or active role) which type of real estate you want to invest in.
If you start searching online for different options, you’ll quickly realize that there’s tons of different choices to choose from. But you can boil all of these down into 2 main categories:
Residential or Commercial real estate
First, let’s define what each of these encompass. An easy way to remember the difference between the two is that residential real estate is four units or less. That’s it. So it includes:
- single family homes
On the other hand, commercial real estate encompasses:
- office buildings
- retail (strip centers)
- storage units
- multifamily (five units and larger)
When people first begin investing with real estate, they typically want to start off small by investing in single family homes. There are those out there that make money in this space but again, it all boils down to your goals.
When I first started investing in real estate, I also thought the way to go was with single family homes. Once I started educating myself, I quickly learned that in order to scale for larger success, it would make more sense to invest in the commercial area.
Another reason involved the risk factor. I, like many of you, have a family and wouldn’t want to jeopardize them in any way. In my opinion, I think multifamily poses a lesser risk.
You know as well as I do that ALL investments pose some form of risk. But not all have the SAME risk.
For instance, there’s a big difference betting…I mean investing in penny stocks versus saving money in a CD. For me, I like to try to get the best possible return while taking the least amount of risk. And multifamily real estate is one of those investments where you can achieve this.
6) Do your due diligence
If you’re thinking about getting into real estate investing, whether passive or active, doing so without doing your research is a recipe for disaster.
Looking back at some of my first crowdfunding deals with Realty Shares that aren’t performing is totally my fault. I didn’t do my part to not only research the property thoroughly but also the sponsor of the deal.
One of the key factors to never pass over is the market area. In one of my previous deals that has still yet to pay in two years, it was in a crime infested area which caused many people to both move out and made it difficult to get renters once they left.
Had I done my part and studied this beforehand, I’d have never made the investment. Lesson learned.
I realize that doing the research is not the most fun thing to do in the world, but it’s one of the most important parts of this entire process. Nobody is going to look out for your money more than YOU!
If you plan on becoming more of a passive investor, then you can outsource a lot of this research to professionals. But you still need to be educated enough to ask them questions on how and why they choose their markets as well as their track record within those markets.
7) Learn and utilize the “Wealth Generators”
When you invest in real estate, there are 4 main “wealth generators” you must pay attention to.
a) Cash flow
One of the biggest reasons people invest in real estate is for cash flow. I love the thought of spending time with my family on vacation knowing that each month positive cash flow is “flowing” my way.
I guess for me as a solo practitioner, it’s even better because I’m been so used to relying on only one stream of income, my practice income.
Cash flow is nothing more than what’s left over after all the property expenses and mortgage is paid each month.
Appreciation happens when the value of a property increases (appreciates) over time. Just like the stock market, there are ups and downs in the housing market (2008 crash). But historically, the value of real estate has typically increased in the U.S.
I typically invest in “value add” real estate which produces “forced appreciation.” This is the concept of increasing the value while physically updating/improving the apartment.
The apartment syndication deals I’m currently invested in typically have a hold time of 5 years. During that time, the apartments are updated, the rents are gradually increased and then when the property is sold in 5 years, forced appreciation is noted.
c) Loan pay down
If you take out a mortgage to buy real estate (i.e. 4 plex), each month your tenants pay you rent, right? What they’re essentially doing is paying down your loan balance for you. This is cool because as they continue doing this, it helps you to build wealth automatically over time.
Here’s an example:
Let’s say you purchased an apartment complex for $500,000 with a mortgage of $400,000. During the time that you held it, it broke even (had $0 in cash flow) and never appreciated – which is very unlikely. Hang with me here while I try to make a point.
So after the 30 year mortgage is paid off, guess what? You now own an apartment complex free and clear worth $500,000 that you never had to save for. Why? Your tenants bought it for you via the loan pay down. Good stuff!
d) Tax advantages
One of the most overlooked advantages of building wealth with real estate are the tax benefits that are associated it. Some of the advantages owners get to deduct include:
- even depreciation over time as business write-offs
Plus, when an investor sells a property and exercises a 1031 exchange to reinvest the proceeds into a new property, the person can defer all capital-gain taxes.
Our government loves real estate investors and uses the tax system to encourage our purchase and leasing of properties.
Now that you know the seven steps to building wealth with real estate, I hope you realize that there’s more to investing in it that just “making money.”
It’s really about taking control of your life, preventing burnout, and not having to worry about whether you have enough to retire on or if you can ever retire at all.
It’s about building real wealth. The kind that allows you to enjoy the financial freedom to go out and do whatever you choose to do.
Are you ready?
Are you ready to begin the process of building wealth and not having to worry about your future?
If so, join the Passive Investors Circle today.