Being a millionaire isn’t quite what it used to be, but it’s still a remarkable measure of wealth that most people won’t be able to achieve. There are many ways to accumulate wealth, from landing a good job and saving the money to winning the lottery or earning an inheritance. But since most people can’t land a job with a high six-figure salary and most people won’t win the lottery, it’s valuable to study more accessible, consistent options for accumulating wealth.
One of those options is real estate investing. But can real estate investing turn you into a millionaire?
The short answer is yes, but it’s not a guarantee, and it won’t happen overnight.
The Paths to Wealth Through Real Estate Investing
There are two main ways to make money through real estate investing.
First, there’s rent collection. If you own a property and it’s occupied, you can charge rent from the tenant. Monthly rent should cover all, or nearly all of your expenses, including your mortgage, property taxes, insurance, maintenance, and repairs. While most properties won’t generate a huge monthly profit, any property with positive cash flow is a valuable addition to your portfolio.
Second, there’s property appreciation. Over time, good properties in popular areas appreciate in value, allowing you to increase your net worth naturally over the years. It’s also possible to directly and more quickly increase the value of a property through renovations. In fact, some real estate investors focus exclusively on this dynamic, “flipping” houses.
You probably won’t become a millionaire by owning a single rental property or having one successful flip. Instead, most real estate millionaires made themselves what they are through a snowballing series of savvy financial decisions.
For example, let’s say you start with a rental property that generates a mere $200 of profit per month, on average. That works out to $2,400 a year. If you save this money for a few years, you should have enough money to make a down payment on a similar property, perhaps in a similar area. At this point, you’ll be able to make $400 of profit per month, or $4,800 a year, and you’ll be able to buy a third property twice as quickly as your second property. Repeat this a few times, and soon, you’ll be making thousands of dollars a month in profit. All the while, you’ll be adding to your net worth by increasing your equity stake in each property and benefiting from property appreciation.
Starting Up: Capital Requirements and More
For most people, the hardest part is starting the journey. Buying that first property is challenging, both financially and in terms of knowledge and strategy. If you don’t have any real estate investing experience, you may not even know where to begin.
There are no real shortcuts when it comes to knowledge and experience. But the fact that you’re reading an article like this means you’re capable of and interested in learning; keep reading and listening to experts, and you should be able to learn the fundamentals quite easily.
There are some shortcuts when it comes to purchasing a house. You won’t need to save up the money to buy a property in cash; in fact, most investors take advantage of loans even if they have the cash to pay for a property in full. In many cases, you’ll need 5 percent (or less) of the purchase price to pay for a property.
You will need to save up a down payment for your first house, and this can be challenging if you’re on a strict budget. However, a handful of simple changes, like taking on a new side gig and cutting a couple of regular expenses, combined with a bit of patience, can help you accumulate the capital you need to start. It’s also worth saving a bit extra for repairs, maintenance, and expenses you may incur while the property is vacant.
Key Risks and Limitations to Acknowledge in Real Estate Investing
We’ve painted a fairly optimistic picture of real estate investing, but it’s important to acknowledge that there are some risks and limitations in this field. There are many ways that things can go wrong, and you need to be aware of them so you can compensate for these risks, practice due diligence, and diversify your holdings.
- Bad areas. Buying a property in a bad area could be a death sentence for this strategy. If nobody wants to rent your house, or if the house actively depreciates in value, there’s no way for you to turn a profit.
- Flawed properties. Deeply flawed properties can also be money pits. If you’re constantly throwing money at repairs, your cash flow could turn negative.
- Time requirements. As you add more properties to your portfolio, you’ll have more responsibilities as a landlord. However, with the help of an Austin property management company, you can have nearly all the responsibilities of a landlord handled for you.
- Extended vacancies. If your property remains unoccupied, you’ll have no income – but you’ll still be responsible for paying the expenses associated with it.
- Problem tenants. Tenants who fail to pay rent and those who actively damage your house can eat into your profits as well.
- Lack of liquidity. Real estate can be a valuable investment, but it’s also illiquid; you can’t sell your house quickly or reliably if you need the cash. Home equity loans may help you close the gap, but these still require time and effort.
- Overleveraging. Taking out loans gives you the advantage of financial leverage, but it’s also possible to overleverage yourself and take on sufficient debt to incur new risks. If you have excessive debt and suffer from significant vacancies, it could put you in a precarious position.
- Market volatility. Historically, the real estate market has performed well and consistently. However, there’s no real guarantee that this will continue to unfold in perpetuity. Volatile market conditions could lead you to overpay for certain properties and sell others for disappointingly low prices.
Getting started with real estate investing, even if you’re just looking for your first primary residence, can be challenging. But with the help of talented real estate agents who know the area well, everything becomes much easier.
At Green Residential, we’re here to help everyone achieve their real estate goals –whether they’re an inexperienced first-time homebuyer or an investment mogul already worth millions. If you’re ready to take the next step in your real estate journey, contact us for a free consultation today!