Short answer? Of course!
If you have a millionaire mindset you can become a millionaire by training dogs.
I know somebody doing it. No joke.
Keep in mind, too, that being a millionaire is not what it once was when the term was invented in the mid-19th century, anyway.
Once you’re in the groove of putting away one million dollars in net worth you’re going to realize it’s not enough to live on in retirement.
Even at a modest $50,000 per year (not even considering inflation) that’s 20 years.
If you’re under 55…hmmm…
Let’s assume for the sake of our subject that when we use millionaire, we’re referring to multi-millionaire, perhaps a pentamillionaire ($5M net worth).
Sound good? Good.
We’ll take a look at 4 areas of investments:
Residential Rental Real Estate
This is a favorite of mine.
Whenever a client approaches the subject of rental property my first reaction is happiness that they came to such a good decision.
One reason is that there are good tax advantages with this option, the big one being depreciation of the property.
Sure, it takes 27.5 years, but that amount is the same every year you have the property available for rent, and it is basically a passive write-off, meaning you don’t spend any cash to get it.
You’re also writing off as rental expenses anything that you’d normally pay for in full on your own home, such as mortgage interest (not the principal, you’re building equity with that), property tax, maintenance, management fees, etc.
Additionally, any major appliances or upgrades on the home that are not permanently attached are depreciable at much lower than 27.5 year lives.
Good example: furniture. That’s a seven-year, and you can even use an accelerated method that writes off 28% of that cost in the first year.
Another reason? Your net income from this activity is passive, meaning no self-employment tax.
If you luck into the right property management firm to handle the logistics, upkeep, and rental collection you can find yourself making good money with very little personal time expenditure.
Buy, Renovate, Sell (aka Flipping)
I know people that have a talent for finding foreclosures and other low-priced properties, and certainly they and many others make quite a bit of money.
Key to this is having that talent. There is a guideline known as the 70% rule when searching for properties for purchase. I say guideline because of course there’s a little room to wiggle on that number.
If inventory is low and you have to pay 80% where you live you can still make this profitable, but naturally it gets tougher because renovation costs have to be carefully budgeted.
To apply the 70% rule you need to know what you expect to close the home at after it’s completely done. Say a nice round $500,000 for example: multiply that by 70% ($350,000), subtract the anticipated costs of renovation (let’s use $35,000), the difference of $315,000 is what you’re aiming to acquire the home at.
Be careful! As we’ve pointed out in an earlier blog, you may not write off the cost of your own time or labor. But, you sure can write off all of the materials, as well as the costs of labor.
It’s also noteworthy to point out that this is active income, as opposed to passive income earned through rental.
You’re in business, and if you are going to do more than a handful of these you may want to consider creating a tax-advantaged entity election such as the S Corporation election.
Commercial Real Estate Investing
Ownership of a commercial piece of property is potentially very lucrative because in many if not most cases the lessor takes on many of the costs of the property including insurance and taxes, as well as maintenance.
This is known as Triple Net, which you’ll also see on the paperwork written as NNN.
You enjoy the growth in your equity while essentially getting all of your expenses other than the mortgage paid for by the lessor.
Your property appreciates during the period of occupancy of the tenant company also, increasing the equity you’re accumulating through your monthly payments even further.
The initial costs of investment are understandably higher for this passive income stream, but the wealth-generation strategy is attractively undeniable.
Buy and Hold
This is simple enough. Buy it, and hang on for dear life while the value goes up over time.
It’s plainly obvious this is a long-term strategy, and keep in mind you’ll pay tax on the gain once you do sell if you do not identify a like-kind exchange property within 45 days.
You will of course have costs with this strategy as well. You’ll want to continue to keep the property in peak condition for resale, and things do wear out over time.
Some Final Considerations
In every case, unless you’re starting out with a bankroll of your own, you’re going to need to use OPM.
That’s Other People’s Money, by the way.
House flippers with a quick need for cash quite often use what is known as hard money, which is a short-term loan with a promise to re-pay in a year or less with a fixed interest nut added to the top.
Like the costs of renovation, this interest cost should be subtracted when calculating the 70% rule.
Yes, it is a legitimate write-off. (Did I read your mind there???).
Taking on this level of responsibility in financing as well as the risk in investing should be taken seriously, and if you’re not knowledgeable or lack good mentorship you need to either get one or the other, or consider another path.
I will close on a positive note here, though: one of my source’s states that 90% of the millionaires of the last 200 years got there through real estate.
Yes, you CAN be a millionaire (read pentamillionaire) through real estate, with the right mindset and a thoughtful accounting representation by your side.
Here’s to your good fortune!