Can You Become a Millionaire in 10 Years Through Real Estate? (Part 1)

September 14, 2023

Investing in real estate harnesses the power of leverage and may help your money grow faster. If you want to become a millionaire in 10 years using real estate, what would it take?

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Okay, so chasing the trend, that’s sort of this, uh, what we are going to classify as a “don’t do.” Don’t try to pursue that, don’t chase that. These next things we’re going to walk through are actually things that you may actually pursue, and we’ve actually seen in the real world, these things lead to wealth building. But you need to go into it with your eyes wide open because the reality might not be the same as what the brochure tells you. And, man, we went right to the heart of this. I mean, a lot of people talk about real estate, and we absolutely love real estate. We’re eight-figure Real Estate Investors ourselves, but we always tell you, real estate’s one of those things. First of all, everybody I’ve seen that’s extremely successful is not super passive. It’s also one of those things where it leans heavily into leveraged debt, which, by the way, is the amplifier of leverage where you put down a small down payment, you finance it. Yes, it can be a multiplier of your money, but it also comes with a big risk. And if you’re not scared or looking at it as dangerous as you’re using it, you’re probably using it wrong. So, we want to kind of get into how do we use real estate? What are the strategies that you see out there trumpeted on social media? Are they fact, or are they fiction?

Yeah, generally, real estate is supposed to be a long-term investment. It’s supposed to be something that you participate in for a long time to be able to generate the reward from it. And if you think about real estate here in the United States over the last 20 years, home prices in the US have increased by 99%. So, on the surface, that sounds amazing, and you’re thinking, “Holy cow, 99%, they’ve doubled, that’s amazing.” And while it sounds like a lot, if you actually look at the math, that only works out to an annualized return of about three and a half percent. So, over 20 years, three and a half percent turns into a 99% rate of return. So, while real estate can grow and can add value, often it’s not a fast, rapid thing that takes place. So, we’ve put together a case study. We said, “Hey, what about an option one? If we’re gonna use real estate, let’s just go with the basic, meaning our home appreciation, our primary residence.” Guess what most people do?

I do want to say, look, we used that three and a half percent over the long period. There’s been periods over the last three years, Bo, where I know real estate was appreciating nine percent annually because of the pandemic, all kinds of strange distortions. So, you probably could have done this with lesser money in the past. But that doesn’t mean that you could do it as easily going forward because if we had such a big run-up in the last three or four years, it probably means this is gonna be more muted or mitigated, you know, slowed down a little bit, especially with interest rates over seven percent. But walk them through if we’re talking about home appreciation only, how would this work?

Yeah, so think about the mathematics that surround this. If you wanted to make a million dollars, and your timeline was 10 years, and the way that you ultimately want to do it is through price appreciation on the real estate that you’re purchasing, what you’d essentially have to do is you have to buy a piece of real estate that costs a little over $1.7 million. Well, if you’re gonna try to do this as quickly as possible, you’re gonna put down a three percent down payment because you gotta leverage as much as you can so that it can grow as fast as possible. So, good luck with that on the $1.7 million dollar home that you’re gonna purchase. You have to put down $52,000 as a down payment.

Then, if we assume over the next 10 years, the house appreciates at three and a half percent per year, you would have an appreciated value of $712,000 over that 10-year period. So, you’ve got your $52,000 down payment, you have the $712,000 of appreciation, and you’ve been paying on the mortgage the whole time. So, you’ve actually paid $236,000 in principal payments on the loan. So, when you add up the principal payments plus the price appreciation plus your down payment, boom, you just came up with a million dollars in a 10-year timeframe.

Now, look, on the surface of this, because I’m adding the $52,000 for the down payment, which is a stretch, $236,000 of principal paid down, you were out of pocket on this. Now, look, we’re leaving off some things, we’ll talk about that. But on the surface, it looks like you put down $300,000 towards this house, and now it’s worth—you got a million dollars or $712,000 appreciation, so you have a million dollars made. That looks great, but there’s obviously some flaws here. What are we missing?

Yeah, it sounds great. There are a number of flaws. Let’s start with the very first one: saving up the down payment. Saving up a $52,000 down payment to purchase a $1.7 million dollar home will probably take some time. And you have to find a lender that’s going to be willing to loan you that much money on such a small down payment. So, just saving the down payment in and of itself is a hurdle that you’d have to get over.

I think this is—and I’ve kind of alluded to this too—there’s some friction costs here, obviously, closing is going to be expensive on the $1.7 million, maintenance, taxes. We’re still leaving a big question mark. That’s coming up in the future. And then, you just alluded to, Bo, you’d have to find a lender. Look, we told you first-time home purchase, we’re all about getting on that home ownership train with three to five percent, not the 20% that you hear all the other gurus talk about. But I think we’re talking about beginner home, your first welcoming into this. When you think about a $1.7 million dollar home, that’s a lot to ask. And I think the banks, the lenders, they’re going to give you some pushback on that. It’s also going to create a monthly payment that you’re responsible for, over $11,000. So, think about what that means. You now have this monthly payment to satisfy the mortgage of this home, of over $11,000. So, if you think about an $11,000 monthly payment playing out over a decade, the total payments you will have made on that mortgage, a little over $1.4 million dollars. So, this idea of, “Oh, I have $300,000 out of pocket, and I turn it into a million,” that’s not really the case. You actually had to outlay $1.4 million dollars in order to accomplish that because when we were talking about the $52,000 down payment, the $236,000 of principal paid down, we forgot to talk about the interest. And right now, with interest rates being over seven percent on mortgages, that’s going to be—you’re going to be in business with the bank on this whole journey to seven figures. So, obviously, that’s maybe the best days for that were in the past. Let’s talk about something that may be a little easier to digest and a little more approachable. And actually, this is a unique opportunity. Let’s talk about house hacking.

Yeah, so house hacking is this idea that you buy a property, but you put someone else in it that pays rent that could likely cover the mortgage. So, maybe this is a single-family home, maybe it’s a quadplex, so on and so forth. So, we started working through the math of what would be required in order for you to house hack and ultimately end up with a million dollars at the end of ten years. And so, this is what we figured out. You would have to buy a home that costs $523,000. You’re going to have the down payment. You’re going to put three percent down, which will be about $15,000 or $16,000 on that. And then over the course of the decade, with the value of the house increasing—we’re assuming three and a half percent annual price increases—and then we’re assuming the principal that you pay down on the house, you’re going to have about $302,000 of total equity at the end of that 10-year period.

So, you bought this house and you had the mortgage, the rental income coming in that pays the mortgage, but you said, “You know, I also realized I need to get to a million. So, I’m going to take the exact amount that I would have been paying on the mortgage, and instead of paying on the mortgage, I’m going to start investing those dollars. I’m going to start putting those dollars to work.” And that number is $3,408. That’s how much you would have been paying on the mortgage. Well, if you, instead of having to pay the mortgage because you’re house hacking, you have that money saved, you’re going to save about $409,000 over that time period. Well, if you take those savings and you then invest that and you can earn a 10% rate of return over that time period, that $409,000 would grow about $289,000. So, if you add up the down payment, price appreciation, principal paydown, saved mortgage amount, invested over that period, you’d get to a million bucks.

Now, I think because you just threw a lot of information very quickly, but here’s the big takeaway for me: house hacking is legit. But realize you’re—if you want to avoid doing mortgage fraud, because why is house hacking such a profitable or good thing is that it takes advantage of the fact that more banks, and when you get your mortgage, they give you preferential treatment for your primary residence. So, you are actually buying your primary residence. That’s what allows you to have less than a lower down payment of three to five percent. It also, because you’re living there, the bank thinks you’re less of a risk because you need shelter. So, they allow you to do this. You can’t use this strategy to buy the house and then move out very quickly because that might be mortgage fraud. But this does work very well if you want to take on a roommate, if you want to have a duplex, a triplex, or a quadplex like Bo talked about. But here’s what I don’t like. This feels very rushed, so I’d like to talk about the flaws in this because even though this is a legitimate, unique opportunity, house hacking is one of those things, I think, works even in this scenario because of the 10 years, it has some flaws.

One of the biggest flaws is you have to save up for the down payment. Remember, you have to come up with, but good luck finding a lender that’s going to let you buy a multi-family property with so little down. I think most lenders recognize multi-family properties are likely going to be investment properties, so they want a little bit more skin in the game. So, just finding a lender and saving up that down payment is probably going to take some time.

Yeah, I think there’s also—of course, with all real estate, there’s some friction costs: closing, maintenance, the interest, all those things. Add up over time. And then, another thing, because when you do house hacking, whether it’s the roommate, whether it’s the duplex, and you’re renting out half of it, you are now in the game of essentially—you’re the landlord. And to assume that you’re going to have 10 years of quality renters, that’s somewhat optimistic. I mean, I hope it does work that way, but that is not often what we see. And the other thing that we see is that we assume that in this analysis, that the renters can cover the full mortgage or its equivalent. Well, maybe that’s the case if you buy a duplex, and you’re charging someone half who’s renting half of the place, and it’s going to cover the whole mortgage. Maybe you get that math to work, maybe not. Now, we recognize we didn’t build in real increases that would obviously come into the equation, but this is kind of—if for this to work, this had to be the best of the best of the best of the best. For more information, check out our free resources.



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