Do you like magic? If you saw someone turn one card magically into 52 cards would you be impressed? Real Estate can help you “magically” multiply your money and wealth.

I love magic tricks. It’s exciting to see something happen before your eyes that logically seems impossible. Whether or not you believe “magic” is real or just highly skilled illusions, you can create magic in your life.

For me Real Estate Investing is magic. It can transform your life and your life’s circumstances, increase your income and your wealth. That is nothing short of magic. It just doesn’t happen instantly so you can’t do a magic show about a guy that started with nothing and a few years later makes $10k per month and has millions in net worth. Think that’s impossible? That’s the magic of REI. Read on to learn why. It’s a longer than normal read but well worth the content. Would you spend 10 minutes to learn how to transform your life? This is one you definitely need to share with your kids or friends. Everyone needs to know and understand this before they start their adult life.

I know we’ve covered this before but let’s take another trip down the REI lane. No matter what, it does take discipline, control, and patience to make it happen. To make this more magical, let’s assume you are able to get a property with very little cash. Generally speaking, the best way to do this is with a house hack. That is where you either buy a single family home and rent out some rooms, or buy a small multi-family (2-4 units) and live in one and rent the others. House hacking is by far the fastest way to build wealth but not everybody can do it depending on your circumstances. When I started over 2 years ago I already had 4 kids so doing a house-hack would not be possible.

Now, with that house hack, let’s say you buy a duplex for $120k. Each side is 2 beds 2 baths. You rent out one side for $650. You live in the other side but also get a roommate to rent one of the rooms and pays $300 to live there and splits the utilities with you. You are now receiving $950 per month for a house you live in. Assuming you got the property with an FHA loan with 3% down ($3600) on a 30 year term at 4% and an average property tax of $1000 per year, your mortgage payment would be roughly about $675/mo including insurance and PMI. And if one side already had a tenant when you bought it, depending on when you close (try to close around the 5th-8th) you will receive a credit for that month’s rent and the deposit from that tenant, which lowers your actual cash required to close to much less. So, in this scenario you are now actually making $275 per month, neglecting any utility cost. So now, instead of you paying rent or mortgage to live, you are getting paid. The tenant from one side basically covers your mortgage payment. So you are getting paid AND saving what you would pay as a living expense so you are now keeping about $875+ per month.

Let’s review that real quick, we are not accounting for any repairs since even if you owned your own home you would have repairs & maintenance as well so we will neglect those for this scenario. If you rented or bought a home for you to live in, you would be spending around $500-800/mo. Let’s just say $650 like the rent received in this example. In one year you would be spending $7800. This comes out of your income. Maybe you make $30k/yr gross, which means maybe about $20k take home pay. $7800 is about 39% of your income you spend on living expenses. With the house hack you instead are making an extra $10,500 per year. AND what’s great about that, much or maybe all of that is tax free because of depreciation.

What’s more, your wealth is increasing because the mortgage is getting paid down, but you’re not the one paying it. Paying down the mortgage while hopefully at the same time the value is increasing, you are building equity in the home which increases your net worth.

Now one year later, you decide to do it again. This time you buy a four-plex for $225,000. Normally with your $30k/yr income and living expenses you probably would not qualify for a loan this size. But because you have rental income and now a higher amount of money saved for a down payment, you get approved. Using similar terms as the duplex, your down payment is $6,750 which you now have more than that saved up because of your living expenses being wiped out. This 4 plex also has each unit with 2 beds 2 baths. Each unit also rents for $650 and again you bring your roommate or get a new one to rent your other room for $350 (slight increase). Your mortgage with taxes and insurance are about $1250. But now since you rented the unit you were living in at the duplex for $675 you now get from that duplex $1325, with your mortgage $675, maybe $725 since the property tax does increase when you don’t live there. So at $725 you are still netting $600/mo. The other 3 units of the 4 plex plus your roommate adds $2,300 per month. Your mortgage is $1250 so you net $1050 from it plus the $600 from the duplex you are now earning about $1650 per month. Accounting for expenses and vacancies you should expect maybe $1200/mo with you managing your own properties. You have just about matched your current take-home pay from your job, BUT you have removed your biggest expense from your life. If you can hold out and do one more house-hack a year later you will be doing well. If you don’t spend your money on new cars or stuff you don’t need, but instead keep saving and investing wisely you will free yourself of the hamster wheel and be able to live a financially free lifestyle.

Is that magic? Let’s look at the 5 ways real estate pays you.

1: Income – you are getting paid. Rents minus the expenses are your cash flow. You want to be sure you have a positive cash flow.

2: Depreciation – Your government wants you to provide housing so they give incentives to real estate investors in the form of depreciation. The “value” of the property diminishes over time. We use 27 ½ years as the depreciation so each year it “loses” that much in value which is taken directly from the cash flows reducing the taxes owed

3: Equity – As your mortgage gets paid down by your tenants your equity (difference between the value and what is owed) increases.

4: Appreciation – Over time the value of property increases. There may be short-term fluctuations in the market cycles, but typically under “normal” conditions home values increase about 4% per year in the long-term.

5: Leverage – This is what makes it all possible. You put down only a small percent of the value but you get 100% of the benefits of the depreciation, appreciation, and the cash flow income. You get to use other people’s money (bank, private lender) to make you money. You can’t do that with stock investing.

You can easily remember that with the acronym IDEAL.

Here’s an example of leverage and why it makes a difference (also see the previous post on leverage). For example, say you invest $10,000 to buy stocks, like shares of Google. If those stocks go up 5% that year, you now have $10,500. A true 5% return on investment. If it goes down 5% you only have $9,500. That money is gone.

If instead you used $10k as a 10% down payment on a $100k property and it goes up 5% the value is now $105k. Your actual equity is now $15k. So you actually just got a 50% return on the cash invested. That’s not even counting the cash flows and tax savings from depreciation and the debt paid down by the tenants. If it cash flows $200/mo that is $2,400 per year which that alone is a 24% ROI. On the flipside, if the value goes down by 5% it’s now valued at $95,000. You still “lost” 50% of your money invested, but you didn’t actually. Because it still cash flows and you still get depreciation and debt paydown so you may net out to 0 or still be slightly ahead. But with a 24% ROI alone you get your full money invested returned in about 4 years.

Going back to the magic, let’s assume you keep at it. And then you start buying up some other small multi-families with 10-15% down payments. You’re doing pretty good, making maybe about $3k per month after all expenses. You’ve basically doubled your starting take-home pay from your job. Now you do one more magical thing, you use a 1031 exchange to trade up. The 1031 is another tax break that saves you from paying taxes when you sell an investment property and use the proceeds to purchase another. Maybe those first two properties, the duplex is now worth $150k and your mortgage has been paid down to about $110k. The four plex is now worth $260k and the mortgage balance is about $210k. That means you have about $40k equity in each giving you a total of $90k. Remember, those two properties cash flow about $1650/mo.

Accounting for realtor fees and other closing costs (if you decide to sell on your own you could save much of those fees, although I always recommend using an agent) you would net about $70k to use. Plus, since you’ve been house-hacking and not spending those earnings and you also kept your job where you’ve received raises, you managed to save a considerable amount of money as well. Let’s say you now have $100k to use. This means you could potentially buy a larger multi-family property selling or about $600k and using 15% down payment, and still maybe have a little left over. This multi-family could be a 12-16 unit that cash flows around $3500/ month.

Thanks to the 1031 exchange laws you sold those first two properties and deferred your taxes due until the future (or never as long as you keep doing 1031 exchanges or hold until you die). You were able to use the full amount of your earnings to put toward a larger property that basically doubled your cash flow. In another 5 years or so you could decide to do it again and sell this new property for maybe a 60 unit or a mobile home park that will cash flow $6k/mo or more. All the while paying 0 taxes on the sale of the properties and virtually 0 taxes on the cash flows.

With the other properties you have accumulated over the years you now have a comfortable lifestyle where you no longer have to work for a living. Work is optional which opens many opportunities for you and makes you bolder at work since you can afford to take risks since you don’t need your job to live. And ALL of it started with just a few thousand dollars to buy a small house hack property. Your net worth went from basically nothing to now well over a million dollars due to 5 ways you get paid from Real Estate.

This is why more millionaires are made with real estate than by any other method.  It’s the math, not magic! Numbers don’t lie. Of course there are always risks. Help yourself avoid most of them by buying right. Avoid warzone areas. Buy in good areas where you would want to live and do an excellent job doing background and credit checks on your prospective tenants. And of course analyze the properties well to account for expenses, maintenance, capex, management fees (even if you plan to manage them yourself because one day you may not) to make sure they cash flow well to begin with. That way even if there is a market downturn and you have to lower rents some or people get late on their payments, you can wait it out and still make enough to stay afloat, even if you have to get a job for your personal expenses, the properties can still pay for themselves so when the economy recovers you have held on and kept paying down the mortgage so you can come out ahead. Unlike many that overpaid in 2006-2007 buying for expected appreciation rather than cash flow and had to sell at a loss, walk away, or file for bankruptcy. Don’t be like them. Set yourself up right at the beginning. Have patience and you can find the perfect property.

Follow this simple advice to make some sacrifices that others aren’t willing to make and you will have an incredible life that others dream of. Your friends may laugh at you for driving an old car instead of a new one, they may laugh when you tell them you want to buy a duplex and live next to your tenants. They may even laugh at the idea of wanting to be a Landlord. But you will be the one laughing 10 years in the future when you have a net worth of several million, haven’t had to work for 5 years and never will have to work again. You spend your time with your family traveling and doing fun things whenever you want. While your friends are in deep debt, have a job they hate and can’t afford to take a vacation.

The same thing can be done without house-hacking. It just takes a little more for down payments and cash flows may not be as good due to higher interest rates, property taxes, and insurance. But a similar path can be taken without living in the property. The biggest multiplier with house-hacking is saving the huge living expense cost so that can instead go toward saving and investing which catapults and accelerates the path to financial independence.

Did you follow the magic? $3600 was “magically” transformed into millions in value and $10k/mo for life.

Which path do you choose? Do you like magic? The most powerful magic is IDEAL.