How To Become A Millionaire In 10 Years (or less)

One other thing she could do, which is a track that I am on, is to buy the houses as you talked about. Then, using the equity that has built up through market appreciation and paying down the principle, sell the older homes to buy newer homes free and clear. Of course the older houses are being paid for by my tenants.

So, if I have 20 houses that are older, but I bought right and have used as rentals and let them "grow' in equity, when all is said and done I want to have them pay off 10-15 newer houses.

This will be after I 1031 then into the newer houses to defer the taxes. I am not real clear on the whole 1031 thing, but I am sure Robert is.

Then if I rent them and they are free and clear...

With todays interest rates if you can put a 15 year note on a house and pay 7% int. you can rent them out for right at or a little more than the underlying payment.

My overall goal is to have 20 houses free and clear, pretty houses, that bring in at least $1,000 a month.

Just some thoughts...

Terry (Houston)

> In the latest issue of The Entrepreneur's
> Hotsheet we linked to a post which
> contained a story about a woman who became a
> millionaire in 7 years. See the story here:
> http://www.creonline.com/wwwboard/messages/49935.html
> While the story revealed what she did - in
> general - it doesn't tell HOW she did it. It
> does not reveal the Investment Math behind
> it.

> This is my take on what she did...

> She bought one property (home, apartment,
> condo, townhouse, etc.) per year using

> Interest Only Loans! Bought correctly,
> the rent should be enough to cover interest,
> insurance, taxes and repairs.

> Assuming it covers these things exactly,
> what then happens is

> the properties go up in value. The
> difference between what she owes and the
> current value of the property is its Equity
> . And that Equity is hers.

> After ten years (or seven in her case), her
> first property should have doubled in value.
> If she paid $100,000 for it, it should now
> be worth $200,000. But she only owes
> $100,000 on it. So $100,000 would belong to
> her.

> Her second property (the one she bought in
> year two) would nearly be doubled and would
> certainly be doubled the following year.

> Adding up the value of all her properties,
> you will come up with over one million
> dollars of worth. Possibly even two million.
> Of that, her share would be quite
> substantial - $700,000 or more, depending on
> how fast the property is increasing in
> value. (At 10% increase per year, the value
> will double in about seven years. At 7% per
> year increase, the property will double in
> about ten years. At 5% increase, the
> property will double in about fifteen
> years.)

> For example: Here is the value and equity of
> a property bought for $100,000 with $10,000
> deposit, over a fifteen year period.

> Year 1: $105,000 with $15,000 equity
> Year 2: $110,250 with $20,250 equity
> Year 3: $115,762 with $25,762 equity
> Year 4: $121,550 with $31,550 equity
> Year 5: $127,628 with $37,628 equity
> Year 6: $134,009 with $44,009 equity
> Year 7: $140,710 with $50,710 equity
> Year 8: $147,745 with $57,745 equity
> Year 9: $155,132 with $65,132 equity
> Year 10: $162,889 with $72,889 equity
> Year 11: $171,033 with $81,003 equity
> Year 12: $179,585 with $89,585 equity
> Year 13: $188,564 with $98,564 equity
> Year 14: $197,993 with $107,993 equity
> Year 15: $207,892 with $117,892 equity

> Note that the proprty is worth $207,000.
> It has $117,892 in equity and the borrowed
> $90,000 is still owed because it was an
> interest only loan.

> Note also that during this time period,
> while the repayments would have stayed
> relatively the same the rent has been
> increased. So if the property was in a
> slight negative cash flow in the beginning,
> it probably became a positive cash flow
> property after two years because of rent
> increases.

> Note also that if the porperty was turned
> into a Share Accomodation type of property,
> the overall rent collected will be higher.
> For example: a 2 bed apartment might rent
> out for $480 per month ($120 per week), but
> you could justify $400 per month ($100 per
> week) per person when renting it
> individually in a "share"
> situation.

> Back to the example property...

> After 15 years, the property value has more
> than doubled and it is producing positive
> cash flow.

> IF one such property had been bought per
> year, then each property would be at a
> different stage of the growth table. The
> property bought in year 2 would have the
> value matching the year 14 example.

> Anyway. After 15 years, you have a whole
> bunch of property. Some will be in such a
> state of positive cash flow - the properties
> near double their value - that in theory you
> can now RETIRE.

> To retire, you Borrow the equity back out of
> the oldest property on an interest only
> loan. The property's existing rent should
> more than cover that "loan."

> You use this money to live on.

> The following year, you borrow the money out
> of house number two - as it has now doubled
> in value and its rent will also more than
> cover the borrowing.

> The following year, it's house number
> three's turn.

> Each time, the loan is interest only. And
> the property's rent should more than cover
> it.

> By the time you have gone through your
> collection of properties, the first property
> should have doubled in value again.

> In our example, that means it should be
> worth about $432,379. Of that, you have the
> original $90,000 loan and the $117,892
> equity you took out - if you could only get
> 80% of that equity you would have gotten
> $94,313 and may have elected for $90,000
> because it's even. Assuming you only took
> $90,000 out, your total borrowing is now
> $180,000 with $252,379 equity! That's over
> one quarter of a million dollars in equity.
> Waiting for you to borrow out again, if you
> want to.

> Note that while you do have the option of
> borrowing the equity back out of each of
> your properties after they have doubled in
> price, many will be throwing off substantial
> positive cashflow because of the increase in
> rent over the years.

> Note also that while this sounds simple -
> and does not require any
> "creative" financing - that
> properties increase in value at different
> rates in different part of the country and
> in different parts of a city. And you will
> need to pick your properties wisely. You are
> only buying one property per year so there
> is No Rush. Also, finding your property will
> require research on your part. And cash flow
> analysis. You need to be able to figure the
> income the property will make you (after all
> expenses - interest, taxes, insurance,
> repairs).

> Well, that's how I believe the woman in the
> story became a millionaire and how you can
> use the same method to also become a
> millionaire and to retire, if you want.

> Final note: If debt scares you, this method
> is not for you. On the other hand, if you
> can handle the debt from an emotional point
> of view, then this method might be right up
> your alley.

> Michael Ross

> P.S. Hopefuly Robert Campbell will jump in
> here and share some of his "timing the
> real estate market" knowledge.

> One other thing she could do, which is a
> track that I am on, is to buy the houses as
> you talked about. Then, using the equity
> that has built up through market
> appreciation and paying down the principle,
> sell the older homes to buy newer homes free
> and clear. Of course the older houses are
> being paid for by my tenants.

Pay down the principle or operate via interest only loans, is a question the individual needs to answer for themselves.

Certainly, paying down the principle will increase the speed of equity build up. But, paying interest only should give you cheaper repayments which should make it easier to get a positive cash flow from the property.

Also to consider is, the increase in equity from princple pay down could have gone towards a deposit for another property.

For example: A $90,000 loan at 6% interest only is $5,400 per year.

A $90,000 loan with principle and interest at 6% over 30 years is $6,475.08 - $1,075 more than an interest only loan.

That $1,000 could be the difference between a property with negative cash flow or positive cash flow.

If the rent matched the paydown figure ($6,475) then the interest only route would see you with $1,075 cash in hand. The paydown route would see that amount stored in equity.

With the cash-in-hand route, you could then use that $1,075 to generate more revenue - or add it towards a deposit to buy another property.

Something else to consider is

TAX

I understand what you want to do. Buy a house a year for say 15 years. After that time, you will have a lot of equity built up in the first houses you bought. You would then sell those houses and use the cashed out equity to pay off the loans of your newer houses.

Then ALL the rent from those houses is yours.

As INCOME it is taxable at the applicable rate.

With the interest only loan example... where you borrow the equity back out... you pay no tax because borrowed money is not taxable!

You won't get the benefit of deducting the new interest payments because it's not a loan used to buy the property. But the increased rents you are charging more than make up for it.

So in the first example... the $90,000 you borrow back out is tax free.

That $90,000 works out to be $7,500 per month.

By that stage, I calculate you will have about $9,000 a month coming in from positive cash flow from the rents, after interest and expenses. A total of $16,500 after expenses.

That $9,000 a month is taxable.

If 40% of it was tax, that leaves you with $5,400 a month.

Added to the $7,500 from the equity borrow and you get $12,900 after taxes and expenses.

If the same tax percentage was used based on earning $20,000 a month on properties you own, you get $12,000 after tax (does not include insurance and repairs).

The interest only route gives you money without tax - but you do still have a debt which is payed for by the tenants. It gives you lump sums plus monthly cash flow.

The "cash in the equity in the older houses to pay off the loans of the news houses" route gives you money you have to pay tax on - income tax. But you are out of debt.

Either method will work. One method should be easier to achieve positive cash flow on. Although both methods can have properties with positive cash flow. Because you are in no rush to buy, you can take your time to find the positive cash flow properties.

You really need to decide whether tax free income is better for you, in your situation, than owning properties free and clear but paying tax on the income.

I personally prefer positive cash flow with lump sums of tax free money while operating within interest only loans, than owning free and clear and having positive cash flow only, because it fits (suits) my investment strategy. - The lump sums can be used to buy more investments, to buy toys and vacations, used to live on, or a combination of all the above.

The key being to know WHAT PURPOSE your money will serve.

With regards to negative cash flow properties... many people are putting money into super-annuation, IRAs, 410 (k), etc. And these are either up (or down) depending on which way the stock market is going.

Using the interest only method or the cash out the equity method, would make a better use of such deposited money.

Some people put $100 a week into these "funds." That's $5,200 a year. And the interest earned is pathetic.

They'd be better off feeding an alligator (a negative geared, negative cash flow property) at a couple of hundred a month. At least they will make some money on equity build up. In a "fund" they could lose a large portion of their money if the market falls (how's that 401k looking now? how's your "super" looking now?).

Think about it... the interest only plan or the equity cash out plan... would have you able to "retire" after ten to fifteen years. And even sooner if the money you pay into your govt accredited retirement funds were instead placed into the real estate options.

Let your employer put their share into those funds. Put your money into one of these plans. You'll be better off.

NOTE: I am NOT a financial advisor. I did not learn this stuff at any accredited course. I do not hold any financial advice certification or belong to any financial advising certified body or association.

I did learn this through the school of hard knocks, though. (Boy, those alligators can eat you alive, financially.)

Michael Ross

P.S. Besides funding your retirement, these methods could also be used to fund college! Start them when your child is born and not only will you have enough money for college, you may even have enough to retire as well as fund college!

P.P.S. These methods, and the income they generate, is on top of other income sources (business or job).

Either way will have rents coming in so they will have a taxable event. And if a home is paid off then you can still get a loan off of it. That you will not pay taxes on that.

I should have cleared up that I am not the one doing this, a great corporation I know is doing it. It is super and I seem to be able to negotiate a great employees benefits package out of them that takes away a lot of their profits.

To the Roth IRA, you can do better that that by using a Self Directed IRA and buy an Option on a property. There is then no real limit to how much Profit can be made in your IRA or your Kids Educational Ira. Even if you started when they are in their later years, they can get it built up quick.

You have given me pause to reevaluate some of my thinking though and I appreciate that.

Terry

I am not using my own credit to buy these houses. I only buy when the people are facing foreclosure or relocation or something along those lines.

I use THEIR Credit and Existing Loans. I just step in and take over. Now, with todays interest rates it does make sense to lower the existing rates by refinancing, but I am not usually in a house that long to make it worth while.

So my option of paying just interest is not usually an option :-)

Terry