Becoming a real estate millionaire is easier than ever. Property prices are in the midst of a long-term uptrend, and so are rents. You can potentially get a fixed payment loan to buy a property that will increase in value while generating more cash flow each year.
Of course, you can’t just snap your fingers and own profitable real estate. Here are some tips for becoming a long-term real estate millionaire.
1. Use debt well
This may seem counter-intuitive to seasoned stock investors. We certainly don’t recommend trading stocks on margin or racking up a lot of credit card debt. So what gives?
The difference is the cost and the warranty. Credit card debt is expensive and that interest quickly accrues against you. Trading stocks on margin can also get you excited quickly. You are required to keep a certain amount of capital in the stock, and if it drops enough, the broker will sell your shares. Even stocks with good long-term potential can be volatile in the short term.
Real estate is stable and generates cash flow. Prices will probably never drop enough to cause the lender to call back your loan or mortgage, and rental income can be used to make your loan payments. Even better, the interest on your loan payments can be deducted from your taxes, even if the tenant actually makes the payment.
Let’s say that over five to 10 years, you amass $1 million in real estate with a 20% down payment. Over time, as long as you manage the property well and keep it occupied, the tenants will pay off the debt and you will become a millionaire with a $200,000 investment. And that’s not even including cash flow or tax savings.
2. Make smart tax decisions
The first level of smart tax management is simple: write off everything you can as fast as possible. Keep track of all relevant expenses. And hire a good CPA.
The next level is more difficult, but perhaps that is what separates future millionaire investors from amateurs. When you sell a property, use a 1031 exchange to funnel the proceeds directly into a new property, with no capital gains tax or recapture of depreciation.
The 1031 exchange rule is similar to an IRA or 401(k) retirement account. This will allow you to continue building your wealth without having to stop and pay 25% or more in taxes.
The catch is that when you finally sell the property, your cost base will be so low and the years of depreciation to be recouped will be so high that you could end up paying tax on almost the entire amount of the sale. .
The solution to this problem is morbid, but it works. Do not sell the property while you are alive. If you continue to trade for larger properties and eventually own millions of dollars worth of real estate at miniscule cost, you will be losing way too much money to the IRS by selling.
Instead, take out a loan on the property and distribute the funds to yourself. You can then use the money while the tenants make loan payments. When you die and the property passes to your heirs, they will be able to increase the base cost regardless of the current market value of the property.
But it is almost impossible to do all this on your own. Hire a good CPA and a good lawyer, and let them handle the details.
3. Stay consistent
Consistency is the key to real estate investing. Stick to a profitable niche where you have a circle of skill. Only buy properties if they are performing satisfactorily. Establish and adhere to standards for new tenants. Don’t overpay your low-rate debts and pay off your high-rate debts quickly.
Many successful real estate investors stumble when they deviate from their plan. Investors who have made a ton of money on multifamily decide to buy a medical practice. Those who only buy bargains pay for a new luxury building. And those who are not used to having a few months of vacation lower their standards and find themselves with a bad tenant.
Spend time creating the best plan that will work for you. Be open to change if you grow personally, but otherwise stick to the long-term plan.