How do you multiply your money repeatedly and infinitely? You invest in real estate. Why is investing in real estate one of my favorite way to multiply money? Four powerful reasons: you can have an infinite return for your investment, simultaneously gain four streams of income, have more control over your success, and you can even accelerate your rate of growth. All of this growth means you can achieve financial freedom sooner. That is freedom to spend time with your loved ones, time to travel, time to spend on your hobbies, time to yourself, and whatever else you want to spend time doing. So let’s unpack what each benefit means.
Gain Infinite Return on Passive Income
According to Robert Kiyosaki, best-selling author of Rich Dad, Poor Dad, “Passive income can be described as income that is received at regular intervals that does not require a lot of work to sustain it — money that you automatically make whether you work any more or not.” When you invest your money (i.e. in precious metals, in stocks, in affiliate marketing, in real estate, etc), you take a bit of time to set it up and you let it passively work for you while you are free to go do something else. Once you buy your property, you can just leave it to appreciate in value as you pay your mortgage— year in and year out. But there’s more, appreciation is only one of four streams of returns.
Gain Four Streams of Income
According to Gallinelli, author of What Every Real Estate Investor Needs to Know, for every property that you can buy and rent out for more than your expenses, you can gain four streams of income from it.
- Cash Flow: Money remaining after all expenses are paid by your rent money
- Appreciation: the difference in value between what it’s worth now less your purchase price
- Loan Amortization: the amount you have paid down your loan principal for the year
- Tax Shelter: deductions you can claim on your income tax for the property’s depreciation, mortgage interest, property management, and repair/maintenance and property taxes. You pay income tax only on the remaining portion of the rental income after you subtract all these other property-related expenses.
Have More Control Over Your Success
There are many factors that affect your real estate investment: location, property value, tax rate, interest rates, property condition, property size, loan type, etc. Also the quality/skill/experience of your property manager, real estate broker, contractor, handy man, tenants, and you determine the level of your success. As you get better at this business (because you are actually running a business!), you are able to determine your own success to a large degree. And you can scale it up when you get more knowledge, experience and exposure to this kind of business.
Accelerate Your Growth Using the BRRRR Method
“The traditional method of buying rental property involves buying a property with financing, such as a mortgage, then rehabbing, renting, and eventually repeating the process later. . .
Through the BRRRR method, you’ll buy homes quickly, add value through rehab, build cash flow by renting, refinance into a better financial position—and then do the whole thing again. Over time, you’ll build a real estate portfolio that’s the envy of your fellow investors.”
So, let’s break down what the BRRRR method looks like.
- Buy a property 20-25% below market. These are properties where the market is in distress (i.e. economic crash), where sellers have personal distress (i.e. death, divorce, etc.) and need to liquidate the property quickly, or where the properties are in physical distress (i.e. leaky roof, unfinished renovation, damaged drywall, horrific landscaping, outdated bathrooms or kitchen, too few bedrooms, etc.).
- Rehab the property: Get the property renovated so it will appraise at the market value (ARP, or after repair price).
- Rent the property to tenants.
- Refinance your property.
- Repeat steps 1-5. And watch your wealth grow!
Compare the Traditional Method vs. BRRRR Method
$300,000 This is the fair market value of your house, for example, after the rehab.
$240,000 You buy the property in cash for this amount (80% discount).
$30,000 You spend this amount more to rehab it (total is now at $270,000). Then you rent it out, and get a cashflow of $200 (after all expenses are paid for the property).
$240,000 You take a loan for this amount (80% of $300,000), which means that you leave $30,000 in capital investment with this property ($270k-240k).
BRRRR ROI (return on investment) = cashflow x 12 months/capital investment=$200 x 12 mos. /$30,000=8%
Compare that to the traditional method, assuming the cashflow is the same.
ROI=$200 x 12 mos. /$60,000=4%
$240,000 This is your loan amount (80% of $300,000).
$60,000 This is your down payment (20%).
While the traditional method keeps twice your investment capital ($60,000) stuck in the property, the BRRRR method allows you to take that 50% difference ($30,000) to invest in other properties. Imagine how many houses you can purchase by repeating this process?
You may ask, “What’s your exit strategy?” Well, selling and doing a 1031 Exchange is an option to avoid paying federal taxes. However, why not refinance it and take out the equity and BRRRR more properties? That will generate more cashflow and build up your wealth faster!
You Can Do It With No Money!
Well, you say, how do I get $270,000 to begin with? If you don’t have that money, there are ways. Read Greene’s book. Or read Brandon Turner’s The Book on Investing In Real Estate with No (and Low) Money Down: Creative Strategies for Investing in Real Estate Using Other People’s Money. You can also explore a Home Equity Line of Credit (HELOC), where you borrow against the value of your primary residence a little at a time as you find great deals, or a Home Equity Loan , where you essentially refinance your property.
Real estate investing is an exciting, lower risk investment with tremendous potential return. There are so many markets out there. Some are cyclical and can experience lots of ups and downs, like in the east and west coasts. There, you may need to time it a bit more carefully. However, the midwest is more linear, meaning home values are steady. Find the best cities to buy rental properties in 2020 here.
Only in real estate investment can have an infinite return for your investment, simultaneously gain four streams of income, have more control over your success, and even accelerate your rate of growth. All of this growth means you can achieve financial freedom sooner. How will you live differently with your newfound financial freedom?