I often tell people that becoming a millionaire in the real estate business is an easy thing to accomplish. They usually give me a look of bewilderment. I say that you don’t have to understand every aspect of real estate in order to begin investing. The best thing to do is start with a basic buy-and-hold strategy purchasing whatever type of property you are capable of buying with as little money down as possible.
How you buy something with as little money down as possible depends on your financial situation and what types of mortgages you’re capable of qualifying for. Since guidelines for mortgages and government intervention changes daily, it’s impossible for me to tell you the best way to do that. I can tell you how I did it for years using the all-money-down technique I described earlier in the book. But I’ll give you a quick refresher course below.
If you bought $100,000 house through conventional means, you may have to put 20 percent down is $20,000 plus closing costs that will cost you approximately $3000. In this example, you put $23,000 down to buy $100,000 investment property. Using the all-money-down technique, you would buy a $100,000 property for cash putting all $100,000 down plus the closing costs of $3000. At this point, you have $103,000 down on the property and you begin to invest an additional $5000 to fix the property up. You now have a total of $108,000 of your money into the property. You put the property up for rent and you find a good tenant, so now you’re empty investment property is a business making money and shows a profit. Now you go to the bank and you get the property appraised with the intention of doing a cash-out refinance. Because you fixed up the property and it’s a money-making business, the property appraises for $114,000. The bank is willing to lend you an 80 percent mortgage on the $114,000 appraisal giving you a mortgage of $91,200. You originally put down $103,000 and received back a mortgage for $91,200 making your out-of-pocket costs $11,800.
When using the all-money-down technique as compared to buying a property through conventional methods, you save $11,200. Now of course, you’re going to have a higher mortgage and less cash flow coming from the property, but you’re also going to have $11,200 to buy the next property with.
Sometimes the homes you buy are going to cost you $10,000 to buy; other times you’re going to break even on the deal. You might even be lucky enough to actually get paid to buy a house, which has happened to me once or twice. The goal was simply to just keep buying as many properties as possible until you build up a portfolio worth millions of dollars. You will make a profit from the cash flow, but most likely that’s going to go back and do things like repairs and vacancies in all the other issues that come up with real estate. If you do end up banking $10,000 during the year from the cash flow of your buildings, there is your down money to buy an additional property and expand your portfolio further.
I have constantly repeated that you’re not going to find the cash flow to be something of tremendous value to you. The cash flow will help pay for the necessary things and give you down money for future deals, but in the end you will work hard for very little money. The real surprise will come when you’ve ridden the cycle from bottom to top and created a gap between your portfolio’s value and the amount of mortgages that you owe for the building. Accruing equity in your buildings, you will slowly begin to see your net worth increasing as the years go on.
For example let’s just say you bought one property a year for five years valued at $100,000 a property. Since the five years that you bought the properties, values have gone up somewhat and the mortgages have gone down, and your net worth is the equity in between. As you begin to see this throughout your investing career, especially when the market is on the rise, it can be an exciting time.