Today, we’ll see how you can move up from an expert investor at the residential level up to a top-ranked competitor in the heavyweight division.

It’s not something you have to do.

You can make a lot of money investing in single-family homes and residential multi-unit properties (1 to 4 units). But it’s something you may want to do … because, just as in the fight game, the purses in the heavyweight division tend to be the largest.

After all, if you’re averaging a 10% total annual return on a $100,000 property, you’re making $10,000 in the first year, $11,000 in the second year (because of compounding), $12,100 in the third year, and so on…

Now, if you invested $10,000 to start with, you made 100% on your initial investment in your first year. And if your returns continue to average 10%, your percentage returns increase in relation to your initial out-of-pocket investment. It’s 111% in the second year, 121% in the third, and so on … And if you invested less to get control of that $100,000 property, your returns are even greater. At an initial investment of $5,000, you start off with a total return of 200% and go on and up from there.

But if you get the same percentages working for you on a million-dollar property, your dollar gains are much bigger. The purses tend to be larger in the heavyweight division. We don’t have to do a lot of compounding to see that. In the first year alone, a 10% return on a $1,000,000 property is $100,000. A lot more money in the same period of time.

But where do you get the $100,000 to put down on a million-dollar property?

Or, more realistically, where do you get the $250,000 plus closing costs and reserves to buy the million-dollar property (since commercial properties of 5 units or more usually require a minimum down payment of 25%)?

The answer: You can start small and get leverage working for you on the $100,000 property. Then you can “roll up” to a larger property, followed by a still-larger property … until you’re in the heavyweight division where you’re generating six figures a year in income and appreciation from a single investment.

So how do you roll up? How do you “put on that weight” as a real estate investor?

  • First, learn how to buy right so you can use the maximum amount of leverage while still getting ample cash flow to cover all your carrying costs.

Then use a special tax loophole to quickly move up the real estate weight divisions. That loophole is called the 1031 Like-Kind Exchange.

How to Go From a Single $10,000 Investment to a Million-Dollar Property, Increasing Your Wealth by 6 Figures a Year

When you buy right in real estate, a 10% return on your property isn’t unusual. Even in an average market, you may average 6% in appreciation, 3% in net rents, and 1% in amortization – for a total return of 10%. Again, that may be equal to a triple-digit return on your initial investment depending on how much you put down – and how long you’ve owned the property. In a rapidly appreciating market, you could get 10% from appreciation alone.

What’s more, when you develop the ability to buy properties at substantial discounts to market value in rapidly improving areas, you can get appreciation of 20% to 40% or more on your property in the first few years of holding it. And, again, this could represent hundreds of percent on your initial investment.

Buy a $100,000 property for $80,000 and you’ve got $20,000 in instant equity to start. Get another $10,000 in appreciation during the first year in a rapidly improving neighborhood and you’re up $30,000 after 12 months. At the end of two years, you could be up $40,000 or more. If you put just $8,000 down to buy the property in the first place (10%), you’ve multiplied the worth of that investment six-fold in a couple of years.

SUGGESTED: Seven Years to Seven Figures

Combine this kind of sharp buying with a 1031 Exchange and you can build equity and passive income at an accelerated pace. Here’s what I mean …

The 1031 Exchange: A Shortcut for Going From a $10,000 Down Payment to a Million-Dollar Cash-Pumping Property Portfolio in Five Years

I won’t go into the details of the 1031 Exchange here, because my Main Street Millionaire colleague and 1031 expert Thomas Phelan has covered it brilliantly before. But here’s the gist: You can’t use it with stocks or bonds. But you can use it with investment real estate and a few other things. And it can help you build wealth far more quickly.

For instance, if you sell a property and have a $100,000 capital gain, Uncle Sam might come in and grab $15,000 for his long-term capital gains tax. Then your state might grab a few grand more. Depending on how long you’ve owned the property and what  depreciation you’ve claimed during that time, Sammy might come back and snatch yet a few more thousand from you in a tax called “depreciation recapture.”

All told, you might get to keep $75,000 while the state and national governments keep $25,000. But if you used the $75,000 as a 25% down payment on a commercial property, it means you could buy a $375,000 property. If you’re getting 10% total annual gains, you’re now gaining about $37,500 a year, and climbing.

But the 1031 lets you invest the whole $100,000 into another property. If you’re buying a commercial property and the lender requires 25% down again, you now can buy a $500,000 property. That may now kick off $50,000 a year in total return and climb from there.

So, you can start in the residential market (less than four units) where low-down-payment financing and even no-down financing is far more available. And you can use, say, a $10,000 investment as a 10% down payment and move up in weight class from there in a fairly short period of time.

Here’s how it might work …

Buy a property under market value for $100,000, using a $10,000 down payment. Sell it two years later for $140,000. So far, very good. But Uncle Sam wants to sit down at the closing table with you and take a chunk of your gains. Instead, you stiff-arm him and say “Paws off!” You use a 1031 Exchange to defer the taxes on your capital gains.

Now you take your $50,000 (your original $10,000 down payment plus $40,000 in gains) and you use it as a 10% down payment on a $500,000 4-unit property generating $50,000 a year in gross rental income. You’re buying under market again and at such a price that the property more than pays for itself – even at 90% financing.

Three years later, you sell for $700,000. Now you take your $250,000 ($50,000 down payment plus $200,000 in tax-deferred cap gains) and you use it as a 25% down payment this time for a $1 million apartment complex.

At this point, if it generates a 10% total return for you every year, you’re now picking up six figures in income and equity every year. All while the property pays for itself. And you started with just a $10,000 down payment five years earlier.

SUGGESTED: How to Buy Apartments With No Money Down

A final note: If these numbers seem unrealistic, let me assure you they’re not – if you’re a sharp buyer. A house I bought for $90,000 under market value last year, appraised for $158,000 just one year later. And I didn’t even use 10% down, I bought it with 100% financing and it still pays for itself.

A duplex I bought under-market at around the same time for $149,000 rose by $97,000, and a triplex I bought at a deep discount of $149,000 came in at $302,000. This was followed by another house I bought in pre-foreclosure that gave me a $42,000 gain in less than six months. All these properties pay for themselves and generate a net cash flow.

All it takes is one of these kinds of deals to get you on your way. Then, sell, use a 1031 Exchange and do one just like it every two or three years, steadily moving up in price category.

The result? You can end up “rolling up” a single $10,000 investment into a 7-figure property portfolio generating six figures in equity and income every year.

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Justin Ford is an active investor in real estate and global stock markets. He is also a veteran financial writer. He has published, edited and written for over a dozen international investment newsletters, including launching the US version of the Fleet Street Letter, the oldest continuously published newsletter in the English Language. He is the author of Seeds of Wealth, a program for getting children to adopt good money habits from an early age. He is the editor of the Seeds of Wealth Quarterly Investment Update Bulletin. He is a contributing editor and author to a number of books on personal finance, including Michael Masterson's Automatic Wealth and Dr. Van Tharp's Safe Strategies for Financial Freedom.