Become a Millionaire with a Duplex
I remember looking back to the late 1990’s when a great friend of mine was purchasing rental properties in Minneapolis. He was aggressive, even more so than many of his peers, and many people said they couldn’t believe that he was paying what many of them thought was more than market prices for properties.
1 – Focus on location for rental demands
He generally bought properties with three things in mind. First, he bought location. He purchased in areas that he saw the demand for rental units as extremely high. The U of M, Grand Ave in St. Paul and Uptown were his three main areas. He moved into Northeast Minneapolis and Eat Street-Nicollet Ave in Minneapolis were a couple of his up and coming areas.
2 – Equity Building Renovations
He also purchased properties that needed renovations. He knew that his competitors often couldn’t envision the property when it was renovated. His final strategy was buy and hold. He was in it for the long-run.
3 – Buy and Hold rather than flip
He started with a duplex, and he grew his portfolio to a One-Million dollar a year income after all expenses. It took him fifteen years to reach this incredible achievement. He didn’t have anyone backing him, he was a middle-class guy with no college education.
What were some of his strategies?
4 – He started with an owner-occupied a duplex.
He kept his costs extremely low which allowed him to accumulate money for several down payments. Banks would look at his personal situation and see he didn’t have a large monthly debt so they were more open to lending money to him.
I remember he had just purchase a used car, and a huge hail storm dented his car to the point that his insurance company gave him a check for 90% of what he had just paid for the car. Most of the people that we knew that had their cars damaged, used the insurance checks to fix their cars, my mentor decided to use it to make a down payment on another property. Sure, he rode around in a car that didn’t look the best, but this delayed gratification would pay huge dividends in the future.
So, delayed gratification seems to be the common denominator to get a great start in the business.
Another one of my clients moved out of his posh condo and into a duplex to save money. As Dave Ramsey, Author of Total Money Makeover, said “live like no one else and you will live like to one else.” He is referring to a small amount of time that you delay gratification to yourself and you will reap the benefits for the rest of your life.
5 – Trade up from a smaller building to larger buildings.
He use the 1031 Exchange tax loophole that allows owners to delay paying taxes on gains by moving the proceeds from one unit to another. Over the fifteen years he went from owning a single duplex to owning 500 rental units including a 200 unit apartment building. To many people the Idea of accumulating 50 extra rental units a year is staggering. You don’t need to do that to have an incredible income, but it is well within reach to you its not just a dream.
6 – Use other people’s money.
The beauty of investing in Real Estate is the power of leverage. With almost every other investment you are not leveraging your return. If you buy a stock in a company you will have a certain percentage of that companies shares dependent on the amount you buy. Real Estate investing allows you to use a 20% down payment to buy 100% of the building and its appreciation and increases in rents.
If you go to a financial advisor they will talk about how the stock market increases on a 50 year average of 5 to 8%. They will then tell you that Real Estate will increase by a lesser amount of 5% for example. The stock market looks more appealing on this basis, however lets look at the real return.
If you invest $100k in the stock market and get a 8% return in one year that is $8000. If you invest $100k in Real Estate and leverage it to buy a $1,000,000 building that appreciates by 5% in one year that is $50,000! You are receiving six times the return due to the ability to leverage your money.
Sure, there is a lot more to managing a million dollar building that there is to plopping your money in a stock portfolio or mutual fund, however you will find the end result is much more rewarding. Another noteworthy item with this is that we are only looking at the appreciation. If you add in the yearly rental net income, the tax benefits of depreciating the property, and the equity pay down of the mortgage, the other investment opportunities will wilt in comparison.
7 – Consistent in spite of market fear
One final thing I saw was that he kept buying when other people were scared to accumulate more units.
In the mid-2000’s he kept buying when other investors started to freeze. He knew if he bought in the right location and with properties that he could improve (thus adding equity and money income) he would come out on top.
Many of the large players in the apartment and condo scene in the Twin Cities are building everything that they can. This should be a sign that they see the rental market as being vibrant for years to come.
By the way, my mentor’s hail-damaged Lincoln has since been recycled, and his delayed gratification has resulted in a life-style that few will ever see.
If you want help improving your future feel free to call us. We love helping people achieve their dreams and improve their future.