How To Become A Millionaire Through Real Estate Investing (Newbies!)

hey it's brandon from biggerpockets and today i want to show you on this whiteboard a real simple explanation of how a person can go from really almost nothing to becoming a millionaire by owning rental properties and hey if you find this video helpful don't forget to click that little thumbs up button below the video it really helps make sure more people are reached with this message so with that let's first get a little bit of clarification on how this works this real estate thing works first of all we're talking about buying rental properties which means you buy a house or maybe a duplex or an apartment building whatever and you rent it out now before i walk you through the math behind becoming a millionaire through real estate i actually want to get us all on the same page or the same board as to the fundamentals about owning rentals on why they're so powerful and to do that we're going to talk about something called the four wealth generators the four wealth wealth generators did i spell that right sure all right so these are the four things that really make owning rental properties so awesome and when they're combined together can make you a millionaire now i talk about these a lot more in depth in my book the book on rental property investing which you can get on amazon or barnes noble or uh wherever biggerpockets. com says rental book but hey let me give you them right now the quick and dirty on the four wealth generators number one is going to be cash flow so the first thing cash flow that's the extra money every month that a property produces in profit it's income minus expenses the key to that though is understanding expenses because they're kind of tricky right make sure you get all the expenses when you're calculating but basically this is just the money you're left with in your pocket at the end of every month now number two appreciation this is basically the simple truth that real estate tends to climb over time in value now sure things like 2008 do happen and prices do drop sometimes a lot but over time prices tend to climb as long as you can hold on to a property long enough you should always see appreciation and that's why cash flow which we just talked about a second ago is so vital right because as long as i'm making cash flow i can hold on to it as long as i need to waiting for the property to climb in value now number three the loan pay down now normally when you buy a piece of real estate you get a loan from a bank which you then pay every month but the cool thing is over time the loan then gets paid down which means you might start owing what's called 200 grand but eventually you'll own nothing right so the loan starts here and over time tends to drop on what you owe it and number four the fourth wealth generator tax benefits okay so for the purpose of this video we're not going to talk a lot about tax benefits but in real life man the tax benefits are huge like if you made a hundred grand from real estate and your friend made a hundred grand from a job or maybe a business they own who do you think would end up keeping more money you would with real estate way more money than your friend alright so let me show you how these four walt dinners can make you a millionaire when combined together [Music] okay let's just say you bought a house as a rental property maybe you put down 20 or maybe you found a more creative way to finance it and you're able to do it with no money down which is by the way is entirely possible in fact we've got a ton of content on bigger pockets all about that heck i even wrote a book on it but anyway let's say you bought that house here's our cute little house and even three dimensional house because i'm fancy you bought the house for a hundred grand and you put down twenty percent so you bought it for the hundred thousand dollar value you put down twenty percent which is twenty thousand 000 down that's a horrible dollar sign meaning you're left with an 80 000 loan or mortgage as we call it now because you bought a property that has cash flow the first wealth generator let's say you're also now at the end of the day you're making two hundred dollars every month in cash flow which is twenty four hundred dollars per year we'll call it twenty four hundred dollars per year in cash flow you're a millionaire just kidding no but this is where it starts right all right so after one year you've now made 2400 good for you right but there's more to that right because during that time your loan balance dropped from only owing like 80 000 that's actually dropped down because over time the loan gets paid down right so you started at 80 but in fact after that time you only owe about 78. 5 so you've made about fifteen hundred dollars just by on loan paydown but at the same time prices tend to go up on average so where the property was worth a hundred thousand dollars you now after one year we'll say on average three percent appreciation it's now worth a hundred and three thousand dollars so let's add all that together right so you have the you've had three thousand dollars in value here you've added fifteen hundred dollars there and twenty four hundred dollars in cash flow so really during the first year you've now three four five sixty nine hundred dollars you've actually added sixty nine hundred dollars to your net worth now of course you're not a millionaire yet but over time the cool thing is that this process speeds up you start paying off more and more of the loan faster and faster and the value of that property goes up as well in fact if you look here the property value getting paid down the other one going up if we were to erase this and we try to draw it on one graph you can see that over time the value of the property we'll call this the value of the property was that we'll call it a hundred thousand dollars it's climbing in value three percent per year but the loan which was that eighty thousand is actually going down each year as well this spread right here is known as equity and this increases over time the longer you hold it in fact here by year 10 it's actually worth about a hundred and thirty thousand dollars but you only owe about sixty thousand dollars on the property which means just alone there you've got about 70 000 in equity now add on the fact that that's over 10 years right over 10 years you've also made 2400 a month in cash flow every single year 2500 a year in cash flow which is another 24 thousand dollars so by this point you've gotten ninety four thousand dollars in wealth built from that one property now i know a lot of you are thinking 10 years of work and you only made a hundred grand that's gonna take me a hundred years to get to a million dollars well here's the cool thing this is just one simple cheap little property i mean once you figure out how to do one deal you can do another and another and another and furthermore you don't have to stay small with a hundred thousand dollar house in fact what if you were to buy a five hundred thousand dollar small apartment complex or even a five hundred thousand dollar house the same principles apply over time the value tends to go up and the loan tends to get paid down so you're paying off a little bit more every month and add a little more in value every single month and you're getting wealthier and that is how you become a millionaire through rental properties you buy cash flowing rentals that increase in value over time while also paying down the loan a little bit a little bit at a time you're becoming wealthier now a couple concerns you might be having number one how do i come up with all these down payments if i'm gonna buy a bunch of rental properties well in the beginning maybe you'll save up for the down payment but honestly i built my entire portfolio using some other creative strategies things like house hacking or burr investing or using partners or raising private money maybe you'll fix and flip houses and use the profit from those flips to invest in rentals there's a lot of ways to put together a deal but the bottom line is if you have a good deal you're going to figure out a way to finance it now number two how do you know if you have a good deal well you got to learn how to analyze them you know we've got calculators over on biggerpockets.

com analysis that you can use i also teach a free webinar every week on bigger pockets where i walk people through how to do the numbers to sign up for next one at biggerpockets. com webinar now what about number three how do you manage all these properties well the short answer is you don't i mean you could but for most of my properties i hire a property manager to look after them of course you still gotta manage your manager it's not a hundred percent hands-off but they're the ones getting the late night phone calls not you all right question number four what if the market drops well that's why i buy cash flow and rental properties if the market drops great i'll just keep holding onto them and i'll buy more properties because now everything's on sale you know what you can become a millionaire through real estate i did it in under a decade yeah it's not going to happen overnight but it will happen if you're patient you stick to sound principles and you continually educate yourself on how to become better and hey if you like this video and you're fired up don't forget to click that little thumbs up button and be sure to subscribe to our channel for more real estate investing videos and content for biggerpockets.