How People Become Wealthy

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Large home with multi-car garage

If your goal is building wealth, investing in real estate is a cornerstone for you.

Even if you’re goal isn’t to become a millionaire, there are certain financial moves that will allow you to live like you’re a millionaire. First, a question for you.

What would you do with an extra $5000 or $10,000 each and every year? I am not talking about a one-time lump sum that is gone when you spend it leaving you wanting more. I am talking about a stream of money that comes to you every year!

Would you go to Costa-Rica in February when every one else is freezing to death in Minnesota, and hang out on a beach and watch surfers?  Maybe upgrade your car to a really cool one? Help someone that needs the money more than you do?

One of my clients spent a month in Thailand. Another a month in Columbia followed by several weeks in Naples, Florida. Maybe you want to send your kids to a better school, or make it so they don’t have $200k in debt by the time they come out of College, or maybe you need relief from your own college debt.

The list goes on.  So, what is the magical thing that I offer?

Well, look at your budget first. You will notice that their are some things that happen every month like clockwork. You have to pay for your food, you have to pay for a place to live, for transportation expense etc. Usually, at the top of the list is your place to live. Most people pay $500 to $2000 a month for a place to live in Minneapolis or St. Paul. It is your biggest expense, but it doesn’t have to be.

Instead of springing for a $250,000 single-family home as your initial home, you should really look at buying a duplex.

A quick look at the math may make the decision easy.

Buy a single family home: $250k purchase price will run you $1619 per month (these are estimates with FHA mortgage).

Buy a duplex for the same $250,000. Your payment will be slightly more with insurance being about $500 more per year. So, lets say $1,660 per month.

The duplex offers two advantages:

#1. You can receive income, in this case lets use $1200. So, your monthly outlay decreases to $460 per month. Keep in mind, you will still have maintenance and utilities like you would in a single-family home.

#2. You can generally use the depreciation of the building, in this case half because you are occupying one unit. The depreciation will be on half the building (figuring $200k value of the building and $50k for the land) the depreciation will equal a $100k x 1/27.5 = $3636.

You can then (see your tax person or a CPA) deduct this from your taxes. In most cases, receiving about $1100 back in actual money. Please note, I am not a tax person or a CPA so please consult with them.

In my example, this happens every year. So, figure your monthly tax deduction for depreciation will wipe out your expense for water, sewer and garbage.

You are saving over $1100 per month by living in a duplex vs. a single-family home. Figure that in one year you have an additional $13k and change. In five years, that is $65k and in 10 years its $130k!

I often para-phrase “The Millionaire Next Door” by Thomas J. Stanley. Most millionaires in the U.S. don’t get there by making huge salaries, they actually get there by keeping their monthly expenses low. Sure, you can pilfer toilet paper from the gas-station, and steal napkins and ketchup packets from McDonalds to cut-corners, but the best way to cut-costs is by reducing your biggest expense-your housing expenses (I am just kidding on the toilet paper and ketchup thing although I have heard of College kids doing that).

The three biggest objections to buying and living in rental property are:

1. The 2 A.M. call because the toilet doesn’t work.

2. Terrible Tenant that doesn’t pay.

3. Vacancies that leave you even more broke.

The Reality to these situations is this:

1. Ask yourself how often you call your landlord at 2 A.M.? I have never done it, and have only received two calls in 13 years. Both were cases where the tenants were having a party, which likely won’t happen if you live in the building….

2. I have only had to evict one tenant for non-payment in 400+ potential months of renting. I had the property leasing within 2 weeks.

3. The current vacancy rate in Minneapolis is under 3% and if you follow the right process you won’t have vacancies. I have only had one month without a tenant and it was because of the above eviction.

Finally, think about all the thousands of hours that you will have to work a JOB to get enough money in a 401k to live the type of lifestyle that allows you $13k in extra income per year. You could certainly work overtime or pickup a 2nd job and work hundreds of hours a year, and then start over the next year. That to me, doesn’t sound like a good option.  I am not talking about waiting until you retire either, I am talking about right now! One simple move and you have a huge change in your pocketbook.