Become A Millionaire By Investing In Multifamily Homes
/To achieve something you’ve never achieved before, you need to become someone you’ve never been before - Les Brown
If you are investing, or want to start investing in real estate, odds are that part of your motivation is money. It’s often said that real estate investing has made more millionaires than any other asset class.
So, do you want to be a millionaire?
Regardless of whether you answer yes or no to that question, it’s worth reflecting on your reasons behind your answer. For me, the idea of being a millionaire someday is becoming more realistic as I continue to learn about real estate investing and passive streams of income. Money is a motivator for me, but it’s what the money ultimately affords that drives me: time freedom. I desire to be a millionaire someday not because I want fancy toys or the status of hanging out with wealthy socialites. No, my desire is to provide for my family and to be free to spend time with my wife and kids on my terms - not my job’s terms. While I know I’m not alone in this desire, why do so few of us actually ever become millionaires?
Of the 7 billion people on earth, less than 20 million are millionaires. That’s just .003% of the world’s population. This absurd statistic begs the question, Why? While becoming a millionaire is certainly no easy feat, surely it’s more possible than less than 1%.
What’s stopping us?
Real estate investing expert Brandon Turner describes his three-part philosophy called the Wealth Tripod, which describes how our beliefs, knowledge and actions towards wealth must be transformed. Turner breaks down the three legs of the tripod as follows:
You must believe wealth is actually possible for you
Many people wrongly view wealth building as an innate ability, as opposed to a learnable skill. Most are never taught how to budget, balance a checkbook, manage debt, invest, etc. So they go through life as victims of their lack of knowledge. Their beliefs about what their life can be reach only as far as their limited knowledge. As a result, they underachieve, live paycheck to paycheck, and have little to nothing to show for in retirement - if they can even retire.
I’d add to #1 the need to see the desire for wealth as a good desire. Countless people don’t pursue wealth because they believe money is evil, and only greedy cheats attain wealth. But if you can determine that your motives are healthy, then working hard for wealth - and using your wealth to help others -is a noble and worthwhile pursuit.
You must learn how wealth is built
Wealth building is a process that can be studied, learned and mastered. There is no easy, guaranteed 10-steps to take to attain wealth. Rather, there are countless ways to build wealth that will align with your personal passions and skillset. When it comes to wealth building, real estate investing provides one of the most diverse and rewarding opportunities. People with all types of backgrounds and personalities can find success in REI. Being willing to learn from people who’ve blazed the trail is vital to your own success.
Warning: many aspiring investors fall prey to the allure of REI gurus who promise instant and guaranteed success. Perhaps the most counterproductive action you could take is to blow thousands of dollars on instructional courses and retreats, especially when there is a bevy of exceptional and FREE REI education available. Education is a lifelong process; so learn as much as you need to put a plan of action in place.
You must live out the steps needed to make it happen
You can believe that wealth is good and attainable, and even know how to pursue it; but if you fail to apply your knowledge then you will stay where you are. Just as every journey begins with that first step, so too does success in REI come through daily action over time.
If your specific goal is to purchase your first 3 bedroom, 1 bathroom rental property, then you need to learn how to find and analyze properties. You’ll need to create your real estate team (realtor, lender, etc.) to get pre-approved and start looking at properties. Many would be investors succumb to the enemy of analysis paralysis: always learning but never applying. You can become an expert in REI, but never start your portfolio. Or you can acknowledge that you’ll never know everything, decide to take action, and learn more than you ever could through the process of purchasing and maintaining your first rental property.
Now that we have a firm understanding of the wealth tripod, and how REI is the superior method, let’s look at how investing specifically in multi family homes is a powerful vehicle towards becoming a millionaire.
Multi family homes (MFH) are 2-4 unit properties, and can be your ticket to attaining millionaire status. Some of the specific benefits of owning MFH rentals include:
Strong cash flow
Multiple units in a single transaction
Relatively easy, long term financing options
House hacking! (living in 1 unit with renter(s) in the other unit(s), essentially living free).
You make your money when you buy - at the point of purchase - by finding a great property selling below market value. When buying real estate - especially your first property - it’s far too easy to be led by emotion. But math never lies, so it’s crucial that you understand your numbers when analyzing a property.
Cash flow is king: this is the money left over after paying the mortgage, insurance and utilities. You’re looking for $200+ per door (so $400 for a duplex, $600 for a triplex, etc.).
When determining monthly rent, the 2% rule is a good guideline which holds that a property should rent for 2%+ of the total purchase price (i.e. a $100k property should rent for at least $2,000/month). However, you also need to consider the market you’re buying in (i.e. what are the “comps”?), the condition of the property, cap rate, etc. Many properties simply won’t produce sufficient cash flow, and aren’t worth the investment.
Other numbers to look at are your cash on cash return on investment (ROI), operating expenses, property value appreciation, etc. While your realtor may likely help you find comps, you will need to learn how to analyze properties. The best place to start would be to use the Bigger Pockets investment calculators.
Now, let’s look at one roadmap to earning your first million dollars in seven years through REI. The info in this example is a summary of Brandon Turner’s 7 Years to 7 Figure Wealth.
Year 1: purchase your first 4-plex for $80k ($20k down payment), with $60k loan.
Cashflow: $800/month
End of year 1:
Received 12 months cashflow ($9,600).
Paid down loan by $800
Forced 10% equity appreciation
Year 2: No purchases, hold property 1
Loan paid down to $58,500
Property valued up 4% to $114,400
Total equity of $55,900 (114,400 - 55,900)
Total savings of $19,200
Year 3: purchase 2nd 4-plex (same equity, cash flow and purchase price of 1st 4-plex)
Property #1:
Total value: $119k
Paid down loan to $57k
Total equity of $62k
Total savings $9,600 (used $9,600 to purchase 2nd property)
Property #2:
Total value: $110k (+10% forced appreciation)
Paid loan down to $59,200
Total equity of $50,800
Saved cash flow of $9,600
Year 4: purchase 3rd 4-plex (same equity, cash flow and purchase price as first 2 properties)
Property #1:
Total value: $124k
Paid loan down to $56k
Total equity of $68k
Saved cash flow of $9,600
Property #2:
Total value: 114k
Paid loan down to $58,200
Total equity of $56,200
Saved cash flow of $9,600
Property #3:
Total value: $110k (+10% forced appreciation)
Paid loan down to $59,200
Total equity of $50,800
Saved cash flow of $9,600
Total equity of $175k between our three 4-plexes
Sell all 3 4-plexes and purchase our first 24-unit apartment!
We use our $150k (total profit and saved cash flow) as a down payment and purchase the 24-unit for $850k, with a loan of $700k
Total value: $1.1 million (10% forced appreciation).
Paid loan down to $692k
Total equity of $408k
Saved cash flow of $48k
No purchase, hold 24-unit
Total value: $1,144,000 (4% appreciation)
Paid loan down to $682k
Total equity of $462k
Saved cash flow of $96k
Quick note: one method to avoid paying the income taxes when selling your properties is with a 1031 exchange. This IRS rule allows investors to roll over the profits from the sale of an investment property into the purchase of a new one - without paying income tax. This tax is differed until the day the properties are sold.
Maximize efficiency and trade up to final property
Total value: $1,189,000 (4% appreciation)
Loan paid down to $672k
Total equity of $517k
Saved cash flow of $114k
After sales fees we will net roughly $1,129,000 for our 24-unit. Paying back the loan of $672k will net us $457k in profit. With our $457k in profit and our saved cash flow of $144k, we will purchase a 75-unit building for $2,750,000 for $550k down payment, and a loan of 2.2 million.
Our final 75-unit property:
Total value: $3.4 million
Loan amount: 2.2 million
Total equity: 1.2 million
Now you can see how investing in MFH can make you a millionaire! No, it won’t happen overnight. But, with the right education and the will to implement these principles, you can work towards achieving this dream. By utilizing this knowledge and practicing daily disciplines you can work towards specific goals to become someone you’ve never been before - a successful real estate investor. And by becoming a successful investor, you can achieve untouchable heights of wealth in order to live a life of freedom, fulfillment, generosity and purpose.
1. https://www.biggerpockets.com/blog/2016-05-02-how-to-become-a-millionaire
2. Brandon Turner (2015). 7 Years to 7 Figure Wealth: A Roadmap to Earning Your First Million Dollars by Investing in Real Estate in Your Spare Time