If you think compounding interest is powerful tool, wait until you see the exponential growth potential of real estate.
Investing in real estate will start out slowly, but there will come a tipping point. A point where you turn a corner and it will explode and grow at an incredibly rapid pace. Be patient. Real estate is not a get rich quick scheme. However, you can get very wealthy in a short amount of time if you do things right. It may seem discouraging buying properties at the beginning. Your passive income goal and financial freedom may seem too far out of reach when you’re only receiving a couple hundred dollars a month off your first property.
STAY THE COURSE! Continue to diligently analyze opportunities, invest wisely, and eventually you will turn that corner and it will explode. It takes a while to reach that corner, but when you do it is an incredibly exciting time. You will take off like a rocket and you will begin making huge leaps towards your goal. It will be within your grasp.
I started like most people starting out on their own in real estate, with a single investment property. After I acquired that one I kept my eye on the market and analyzed other potential targets. When the right opportunities arose I’d acquire another, and another, and another. I continued on this path of slowly acquiring a duplex here, a rental house there, and it took me about five to six years to hit that corner and then BAM!
I hit that tipping point and went pedal to the metal. In less than a year I went from 16 rental units to 70 rental units! Seriously… I grew my total rental units by nearly 440% in less than a year. Right now you’re probably thinking yeah right, how is that even possible? Well there are three main factors that account for exponential growth power of real estate investing. Three ways to make giant leaps and bounds when you hit that tipping point.
PRINCIPLE ONE: IT FEEDS INTO ITSELF
Let’s start with your first property. You saved up $20,000 and got your first investment property that cash flows $250 a month, which is $3,000 a year and 15% cash on cash return. This is where it could be easy to get discouraged. You took your time spent to educate yourself and dug in and finally got your first property to maybe have 1/30th of what you would ideally have to live financially free. Saving up and acquiring another 29 of these may seem like an insurmountable task, but stick with me though.
This is only the first of three methods to exploit the exponential power of real estate investing. You just have to make it to that corner. Then you’ll make giant leaps and be at your goals in no time if you exploit all three principles.
Ok, back to the example. For simplicity, we’ll assume you always acquire the exact same type of property with the same cash flows. You got your first property for $20,000 down and now you have an additional $3,000 of income a year. Do not go spend this! Keep it in a separate account and use it to feed into saving for your next rental property. You now get your second property and we will assume it’s exactly the same as the first. Now you have $500 a month in cash flow, or an additional $6,000 a year to feed into the next investment. This means that you’re able to acquire your third property that much sooner. Then you have $9,000 a year feeding the machine, which means you can acquire the next that much faster. Then $12,000 a year, then $15,000, then $18,000…
This cycle continues indefinitely. Each property you acquire means a shorter and shorter time period before being able to purchase the next. You are able to acquire faster and faster and faster. Even if you never added another dime of your own money other than the first property and just used the cashflows to purchase more, at the end of twenty years you could easily have ten of those properties. 10 rental properties in 20 years just from a $20k initial investment. Not too bad! If you can add other savings in as well you can really move quickly. And if you add the next two principles it’s simply incredible.
PRINCIPLE TWO: EQUITY CAPTURE
You have the ability to refinance existing properties and pull cash out. Capturing the equity that your renters have paid for. This is a very powerful tool to keep in mind. You may be thinking that it would be better to just keep paying them off because then eventually the mortgage would be paid off and you’ll make more by not having a payment. But I’m going to show you why that is not the best path to take.
Assuming property values stay close to their historic 3.5% annual appreciation, you would have enough equity in the property to refinance it, pull out equity, and purchase an identical property with that equity in just four years. So, at year four you can refinance and acquire an identical second property. Now at year eight you refinance both, pulling out enough cash to buy two more and now you have four rental properties. You wait another four years and at year twelve you refinance all four and buy four more. Wait another four more years and do it again with all eight and now you have sixteen. And finally, at year twenty you can do this again and refinance all sixteen for a total of THIRTY-TWO properties. just from harnessing the power of capturing the equity that your renters are paying for.
At the end of twenty years you could own 20% of thirty-two properties, or if you didn’t tap in to that at all and you just pay off your first property, you would only own 100% of one property. 20% X 32 is 640% more equity than having the one property completely paid off. I guarantee the amount of annual cash flow you make off of an additional thirty-one properties with mortgages is WAY more than you would make off of just having that first one paid off. If you combine the power of capturing equity along with the first principle of feeding into itself, you can really start to see the exponential power of real estate investing.
Combining this principle with use all the cash flows for purchasing more you could end up with approximately 76 like properties at the end of twenty years. SEVENTY-SIX properties just from the initial $20,000 investment and nothing else.
PRINCIPLE THREE: INVESTOR POTENTIAL
This was the main catalyst that propelled me from 16 to 70 rental units in one year. And that number was just my percentage ownership of all properties. The total number of rental units that I owned or was a partner on went from 20 to 107. If you do things well over the first few years and you have a proven track record of several successful investments under your belt, you will start to attract investors. They will see what you have done and want in. You begin to be able to use other people’s money to purchase properties.
On your first one or two deals with an investor you may have to put up some of the equity. But it’s very possible to have investors put up 100% of the money. You will get a percentage of the deal with nothing in other than the time required to find and run the deal. That means you’re making an infinite return because you’ll make annual income with zero invested, and get a percentage of the equity without putting any money in.
This also feeds into itself too. As you continue to find successful deals that provide your investors good returns it will get easier and easier to attract more investors for future opportunities. Your current investors will want to give you more and more to invest. They will tell others about the returns you are getting them and the people they talk to will want in. Eventually you will have the problem of not being able to find enough deals for all the investors that want to partner with you. Imagine what your chart of rental properties owned from above could look like if you add in the possibility of investors into it! The timeframe would be compressed by YEARS!
By combining all three principles, and doing things right along the way, you can turn that corner and just explode. You’ll take gigantic leaps towards your goal in a very rapid manner. Do not lose heart in the first few years while things seem to be moving slowly. Stay the course. Don’t try to force things. Keep diligently pressing forward. Then you will turn that corner too and be at your goals before you know it.