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.