“She works hard for the money, so hard for it, honey” – Donna Summer

And we all do. We all work hard to bring home the paycheck. And unless we want to live paycheck to paycheck, as some 40% of Americans do, then the trick is to get some of that paycheck to work for us. To put some of the money to work earning more money, so that little by little, we climb out of the hamster wheel of work – spend – broke – work again.

Only three primary ways to make money work and create money exist:

• Active investment – such as putting money into starting a business, that with effort will turn a profit.
• Passive investment – such as buying stocks, mutual funds or Bitcoin (okay, is that an investment or speculation? I will let you decide.)
• Real Estate – either flipping, which is really an active business; or buying and holding for the rental income.

And, you could add talent which results in a side hustle – think playing with a band at the bar on weekends, waiting for patrons to put bread in your jar, or making corn hole boards to sell out of your garage on Craigslist. And while a side hustle could grow into something substantial, most are a little extra money that require your direct input of time and talent. So for now I will discount that, as we are looking for a place to put hard earned dollars that will generate more dollars consistently and, to a degree, passively.

All three options for investing are good, and worth exploring. At the moment let’s just take a look at the third option of buying – specifically buying and holding – real estate that is then rented for a consistent profit.

I really like hard data. But as I researched this article, I have had a hard time finding any solid data supporting the number of millionaires in this country that became so principally from buying real estate. (If you know a source for that data, please share it in the comments).

So, many articles cite either 80% or 90% of millionaires became so because of real estate; with 90% being the most often cited.

Personally, I suspect that is not really hard data, but due to the general adoption of this quote:

Ninety percent 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

I cannot be certain, but that’s where I track that oft-cited quote of 90% of millionaires became so because of owning real estate.

Now, anecdotally I can tell you that of the thousands of people who have sat across my desk to get a mortgage over the years, most of the millionaires did indeed own multiple income producing properties. Not all, but a majority. And one, again, that I cannot quantify with hard numbers.

So, we cannot determine whether 79.2% of millionaires became so in part by investing in real estate, or whether that number is more like 90.3%. But, again anecdotally, I can say it is a large percentage.

So what about you? You want to join the high percentage and take some of your hard earned dollars and invest them into rental property?

I can help. By walking through some numbers on how to get into the property.

First, I am going to exclude commercial property, like office buildings or retail space, and I will exclude simply flipping property, buying, fixing and selling the property in a very short time period. Both are good alternatives; just not ones that I have a lot of personal experience with. I cannot add to that discussion very much.

To the point of buying a 1 to 4 unit property and renting it over time? Yes. There I can help.

And the first 3 rules of real estate: Location, Location, Location.

I don’t think that I would overthink this. But it is worth mentioning and considering.

I grew up in northern Indiana, in a tiny bedroom community that fed a GM Plant. The plant closed, and the community just about died. Don’t worry, I still have great memories of a fantastic place to grow up. But the result is a bunch of dirt cheap real estate. At a glance, attractive. But with no real prospects of growth in any foreseeable future, it is probably not going to be a good place to own, as rents will be flat to declining, and the turnover likely high.

Contrast that to our home now, a town on the outskirts of Charleston. Growth is all there is, all around! And it looks like that will continue for some time. Charleston is an area where I mean, location – the specific address of a property you might purchase – is not so important. Sure, every city has its specific areas that are a bit rougher; but in general whether you buy downtown near the College of Charleston or out in Goose Creek near the Naval Base, you really cannot go wrong.

Prices will vary. Appreciation rates and stability of renters will be similar.

So, location in broad terms is a factor. In specific terms of a city you have identified as stable or growing, not so much. I see people way overthink this, instead of just focusing on the numbers and pulling the trigger to buy and then get it rented and cashflow coming in.

The next pitfall to avoid is mixing investment strategies.

A whole lot of novice investors, first-timers, want to buy and hold, but treat the search for a property like a flip.

If you are flipping a property, you really do need to find the diamond in the rough. Think Chip and Joanna Gaines finding the dog of a property in Waco, TX, and transforming it into the best looking home on the street – and creating equity for the home buyers in the process.

A rehabber needs to find a property that he can buy at $150K, put $40k into the renovation, and sell it in two months for $240K. Or some numbers that look similar.

The novice buy and hold investor, in my experience, looks for the $150K property that can create instant equity – while still planning for the next 10 or 20 years of rental income + appreciation. When in reality, that buy and hold investor could pay the $240K retail and be just fine – building equity over time through the renter paying enough to cover the mortgage + expenses, and reaping the appreciation gains.

Don’t overcomplicate it.

Here is an example, based on our projected appreciation rates here in Charleston, SC:

The same $240K home is purchased for, well, market value of $240K, putting 20% down payment, or $48K down. Here is the equity gain after nine years, based on both forecast appreciation by the National Association of Realtors for Charleston County, of 2.774%, and the historical appreciation for the same county of 4.58%:

Why the discrepancy in appreciation rate? Simple. No one can know the future and what appreciation will be, actually. The truth is likely somewhere in the middle, or just above or below one of those values. What is unlikely is that property values here will decline over the next 10 years.

And that means with our example that the total equity gained between the property appreciating and the principle reduction on paying the 30 year mortgage will be:

So, some $100K – $150K increase in net worth, excluding the initial down payment.

All while the renter(s) are paying the mortgage and covering the maintenance costs. And rents do increase over time, of course, so there may be positive cash flow on top of just covering costs. That would be a plus. Either way, our hard earned dollars end up working and creating dollars as well from our investments.

And a quick glance at the same deal, same assumptions, over a 15 year period:

Okay, now imagine you do that every other year, for 5 years. You are very quickly getting to a million dollar net worth, with cash flow that will serve you well into retirement. Okay, very quickly over a 15 year period, that is.

And, during those first 10 years, the monthly math looks something like this:

• PITI Mortgage payment on the $192k loan:   $1350/mo
• Rent of $1875 – 10% management fee:         $1688/mo
• Cashflow left to you:                                       $   338/mo or $4k/year

The $4k in positive cash flow per year should be put into an account to cover maintenance of the property for at least the first couple years. Once there is a sufficient buffer for repairs, probably $10K or so, then the rest can accrue toward the next investment property purchase.

Oh, and rents are not stable at the start of $1875. They can and normally do increase annually at some 2-3%. So year 2 might see the rent rise from $1875 to $1920/month.

And that’s how, with long term rental properties, your hard earned money can work for you.

The problem: How do you come up with the 20%, or in our case the $48K down payment?

Well, let’s take the example of a couple where both spouses work, he earns $60K a year and she earns $80K a year. If you are like about half of American households, that $140/year combined income, you then have about $100K after taxes, and the two of you, or the family, live on about $110K a year.

That math does not work.

So, to make this investment work, you have to first decide to not live like the average American household.

The more radical U.S. households do one of two things: they either live on one income and use the other to invest. Or, they have a side hustle that brings in additional income, which is all ear-marked to investing. After taxes, of course.

That is the decision, then. Can you live on less than you make?

For almost all of us the answer is a definitive, “Yes.”

So the real question is, are you willing to live on less than you make?

If you are going to make your hard earned money work for you, and get out of the paycheck to paycheck grind, well, it’s the only way.

You have to live on less than you make. And there are two ways to do that. Make $80K and live on $50K of that. Or, have a side hustle or side business where all the profits go into investments. Your choice. But there is no other way to invest and grow money into other, more passive income and assets.

So, investing in real estate is a great way to build wealth, over time. You just have to have enough to get into the property, and that is living on less than you make; and you have to be ready and willing to make an offer and close. And be patient.

If I can help you run an analysis for your specific property, similar to the examples above, let me know. And should it make sense for you, I will be honored to help you with the financing on the property. https://www.atlanticcoastmortgage.com/loan-officer/jim-duffy/