Why The Richest People Invest In Real Estate! 90% Of Them!
The rich get richer and richer and they don’t even do much. What is the secret? Why do the millionaires get even richer and richer? Well, did you know that 90% of all millionaires invest in real estate? And that’s the secret. I’m going to talk about seven reasons why millionaires invest in real estate.
Here’s a quote from Andrew Carnegie, “90% of all millionaires become so through owning real estate. More money has been made in real estate than in all industrial investments combined. The wise young man or wage earner of today invests his money in real estate.” Andrew Carnegie investing in real estate is one of the safest and most efficient ways to make money. It is safer than owning stocks or playing with crypto or any other investments. As you heard before, 90% of millionaires became rich through real estate. So maybe you should too. And when I talk about investing in real estate, it does not mean your house.
Of course, you want to own your house. That’s your first step. But once you own a house, you want to invest in other properties. And that’s how you grow your riches and your net worth by owning it, leveraging it. And I’m going to show you seven reasons why millionaires do it. And that’s exactly why you should do it too. Step by step.
Reason number one is why they invest in real estate because it appreciates you doing nothing. I’ll give an example. I’m in Orange County and I’m in Hills, California, and the median home sales price is approximately a million dollars. So if I buy a rental property, let’s say I buy a house or two units which are not here anymore, but let’s say I buy a house for a million dollars today. Historically, on average, home prices in the US appreciate anywhere from three to 4% per year, depending on what cycle you bought the home on. So if it appreciates at 4% per year, the million-dollar house that you buy today will be way more than double or even triple in value. So it could be worth 2 million, 2.5 million, or 3 million depending on the average appreciation rate. So by you buying an investment property today for a million dollars and without doing anything at all, of course, you’re going to pay your rent and your mortgage and have a tenant in there, it will automatically be at a value of over $2 million plus other benefits. So the number one reason why this is simple and without you doing anything, buy, be patient, and wait for 30 years, it’ll double or triple in value.
Number two reasons why they invest in real estate is once you buy real estate, and assuming you put 20% down or 30% down, or whatever, down payment you make so you can at least break even on your payment. That’s a benefit to you. So you can create passive income down the road. In Orange County, it is very difficult right now to put 20% down, buy a rental property, and break even. But we are always looking at long term and we are looking for passive cash flow. So what is passive cash flow? I’ll give an example. I had a friend of mine, I sold him a house as a rental 15 years ago. Back then, the house was worth about $500,000. It’s worth about almost $850,000 today. His mortgage payments back then, if I remember correctly, were around $1,500 to one, $600, which includes the PITI (principal interest tax and insurance). So at that time, 15 years ago, he was barely breaking even, which is good for California, maybe in other states. If you put 20%-30% down, you will have a cash flow right away from the first year, to the second year. But in Orange County, it’s a little bit difficult because the prices of the value are high. But remember, in Orange County, the appreciation is high also. So it kind of makes up.
So talking about passive income coming back 15 years today, that same rental unit that he bought and he was paying $1,500 a month, he’s now getting almost $2,500 a month. Yes. So he’s getting $1,000 a month of cash flow. He did not refinance it. He still has the house and his mortgage payment. He did not pay a dime on mortgage payments because the tenant paid for it. So on one hand, the tenant is paying the mortgage for my friend who bought the house and he was paying $1,500 a month way back, 15 years ago. And now with a different tenant, obviously the tenants move and you put new ones. So you can also raise your rent. And the rental rates have gone up in the last five, six, seven years at an average rate of 4% nationally. So now that house, he’s getting $3,000 a month or $2,600, $2,700 a month. So he has positive cash flow. And that’s one of the secrets of why people invest in real estate.
Reason number three, rich people invest in real estate is because of tax benefits. We have always heard that the rich people don’t pay taxes. And you are correct and you’ve heard that right already, right? Rich people pay less taxes than the average person as far as the ratios go. And one of the reasons is because they are invested in real estate. Like I said, 90% own real estate to leverage and become more. So when you invest in a rental property, you get tax benefits like immediate depreciation on your property.You get property tax write-offs, and you get mortgage payment write-offs up to certain limits depending on your state and county. And you get other self-employment benefits. If you’re self-employed, you have other benefits. So this is why, if you’re rich and you’re paying a lot of taxes, you need a vehicle like real estate to save on taxes. In fact, I’m showing a house right now, four units in Orange County to a lady. They own a manufacturing company, and they make so much money, they paid almost $800,000 in taxes. So they want to buy a property so they can save on taxes this year. So when I sell them a property, they will save on closing costs, they will get depreciation, they will get property tax write-off, they’ll get mortgage interest write-off and lots and lots of benefits. So there are a lot of federal tax benefits by owning rental property. The fourth reason why millionaires invest in real estate is because you can leverage your investment property. And there are four ways to leverage your property.
The number one way to leverage your property is that you can leverage money with other investors. So let’s say there’s a 20-unit multifamily unit building, and it’s a very good deal. And you need, let’s say, a $500,000 down payment. But you don’t have the $500,000 down. So what you can do is you can go find partners or investors or syndication, and you can pull together, let’s say each of you put 100,000 each five investors. At 100,000 down payment, you have half a million dollars. And now you are buying a great property. You’re going to have great rents. And over the years, you are leveraging the property and your partners to grow together. Of course, your profits will be one-fifth, but one-fifth is better than nothing. So that’s one way to leverage the property.
The second way to leverage is to leverage with time. As I mentioned earlier, as the property appreciates, every year, five years, ten years, and 15 years. The value of your property let’s say that 20 units was bought for $3 million. It’ll probably be worth $6 million in 30 years because of natural appreciation, and you are doing nothing with it. On top of that, your rents will increase in five, six, seven years. So you will have a positive cash flow. Plus, by leveraging that, you are increasing the value of your home because of time. Time is on your side when it comes to real estate.
The third way to leverage is you leverage other people’s experience. I’ll give an example. I have some friends who invest in hotels. There’s one developer that I know of. What he does is he finds land, goes to the city, gets an entitlement for a hotel. And once he does that, he already has some investors lined up. So if they need a million or $2 million down payment, they can find ten partners or five partners and make a pool. Because I don’t know anything about real estate or other investors don’t know anything about real estate. They have invested in this project. The main guy who knows about real estate and hotels is going to develop that property, have the construction going, and manage the property, and once it’s up and running, it’ll appreciate in value. You’ll get all the tax benefits and you’ll get cash flow. Just because one out of the ten partners knows how to do it. He’s an expert. So you let the expert do the work you are making money by leverage. So that’s the third way to leverage real estate. And that’s again why people do that.
The fourth way to leverage a property is the property itself. Well, if I have a single-family home as a rental, and if it’s vacant for three months, then I lose money. Of course, it’s tax-deductible. So you get some benefits, but you still lose cash flow for those three months. But if you had two units, four units, or 20 units, and even if one or two units were vacant, you are making enough money to make the payments. So the multiple units is leveraging itself. The other way to do it is a lot of people find what we call two on a lot or three on a lot. So what you do is you go find properties that have one house on it and have a 15,000, 20,000-acre lot, and it can be zoned for multifamily. So once you buy that house, you can add additional units and build additional units, or you can tear it down. And if the city or the county gives you approval, you can build 5 to 20 units. So you’re leveraging the zoning of the house, the units itself, so that it’s not vacant, and increasing your passive and cash flow and the value all at the same time. So leveraging is a big way. Those were the four reasons what leveraging is.
The fifth reason is what we call the principal paydown. One of the biggest and most simplistic and mind reasons to buy real estate as a rental is because the other tenant, or the tenant is paying your mortgage. In other words, we always say, is it better to buy or rent? And I have videos on it and you’ve heard real estate gurus talk about it, why you should buy and not rent. Because when you rent, you are paying the landlord’s mortgage and not your mortgage. So how cool is it that if you’re an investor and you put a mortgage or you put a tenant in the house and he’s paying your mortgage? So that’s exactly what the principal paydown is. You buy a rental property, whether it’s a house or two three units or 20 units, and all those tenants, bid by bid, are paying your mortgage payment every month. So every month that they pay your mortgage, they are paying down your principal. If it’s a million-dollar house and you put $200,000 down, you have $800,000 worth of principal. But over the years, you don’t pay a single dime on that mortgage payment on the $800,000 principal because the tenants are paying for you. And that is what we call OPM. The biggest way to get rich is to use OPM. And I don’t mean OPM like what you’re thinking about, but it’s OPM (other people’s money). So leveraging principal payments paid down by your mortgage is a big secret and a lot of people don’t use it. They just buy a house and pay their own mortgage. But you should buy a house or rental and have the other tenants pay your mortgage.
The 6th reason is refinancing. So let’s go back to that example where I sold my friend a house for $550,000 and now it’s worth approximately $850,000 and he has not refinanced yet. And the tenant has paid his mortgage and my client has paid zero on the mortgage because the tenant is paying for it. So now he bought that house for $550,000. And I remember he put 20% down. So he put almost $100,000 down. So approximately his mortgage payment was around $450,000. And now after 15 years, I’m sure it’s around $300,000 balance left. I’m just assuming that. So now the property is worth $850,000. And let’s assume that his mortgage balance is $300,000, which means that he has an equity of $500,000 in there. Now, if it’s worth $850,000 today, usually you can refinance and pull some cash out. So you can pull out $100,000, $200,000, $300,000 from that property and invest in another property, put a down payment on another property. So now you have a second property. But remember, even if you refinance, and let’s say the current mortgage is $3,000, and when you refinance now your mortgage payment is going to go up, let’s say it went up from $1500 to $3,000 because it’s $850,000. And today’s interest rates are, let’s say 6.5%, that’s okay because even after pulling out the cash and having a new mortgage payment of $3,000, the new rents are $3,000. So even after pulling out $300,000, and buying another property, you are still breaking even on the property. So that’s one of the very, very advantageous ways of leveraging property. Buying your 2nd, 3rd, 4th, 5th,6th, 7th property is leverage, leverage, leverage.
The 7th reason is when you buy real estate, you feel good. Imagine you bought a house and you felt really good. Now after two or three or four or five years, you bought a fourplex or a ten-unit apartment building, or a commercial property, or invested in a hotel or invested in a senior living with real estate, you feel really good. Why do you feel good? Because every time you own property, you feel really good. I know when I first bought my used car, it was pretty much beat up. I could barely afford it. My first car was a Fiat, and I felt really good owning that beat-up Fiat because I owned something. When I bought my first condo for $121,000, 25 years ago, I could barely afford a $121,000 condo. I was married, I had two kids. I just invested in a business and I bought the house at the same time. Very, very nervous. It was a two-bedroom, one-bath, but it felt so good that I owned real estate and I was making payments on it. So real estate investing and investing in anything is feeling good. I have invested in cryptocurrencies because my friends always talked me into it. I should change my friends. Anyway, kidding aside, they convinced me to invest in crypto and I was very nervous. There’s a reason why I was nervous because it’s way down right now. I have also invested in stocks and it keeps me nervous because they go up and down. They go up and down. I also have real estate investment, and I know that I’m very at peace with that real estate investment because I never have to worry about it. The tenants are paying the mortgage and I know that in 30 years it’s going to at least double or triple. So it’s a peace of mind. And I feel good about the investment properties. And that’s one of the advantages, is you are doing something that you love. Maybe if something goes wrong and you have good tenants, you want to go fix it. Maybe you want to remodel the property because the tenant is so well, you want to get them new carpet or new paint. It’s a feel-good business. So hope this helps. Let’s invest. Call me or direct message me if I can help you with anything, or refer a lender or a realtor to.