At least 30 U.S. billionaires made their money from real estate; some say that it’s the greatest way to create real wealth and financial freedom.
These six tycoons and members of The Oracles suggest how you can invest $100,000 or start with nothing.
Although I’m a businessman first, I've always been a part-time real-estate investor. You can do both, too. Have a business or career that creates positive cash flow, which you can diversify into part-time real estate investing. I've done it for many years.
If you’ve never invested in real estate, start small and don’t use all your money. No one's ever looked back and said, "My first deal was my best." You’ve got to learn how to read the contracts, build your network of specialists—for example, lawyers and realtors—and develop a good eye for it. This only comes from experience.
The beauty of real estate is that you can learn the ropes while starting small: find some cheap properties, like single-family homes, renovate-and-flips, multi units, or commercial properties. Try to commit as little as possible while you get some notches under your belt. Joel Salatin, my mentor, always said, "Make your mistakes as small as possible without catastrophic consequences."
If you have zero cash, maybe do wholesale deals. A business partner, Cole Hatter, and I created a real-estate program teaching you how to put a property under contract for very little money down, sometimes less than $1,000; you sell that contract to another buyer before the contract expires. Worst case: you just lose under a grand. Best case: you make $5,000-15,000 positive cash flow that can be reinvested in long-term holdings.
It’s easy to give up on the real-estate game because you don't have any money, but it’s the deal that matters, not how much money you have. Chase the deal, not your budget.
I know a guy who saved $50,000 and started chasing $200,000 deals. First of all, you can't buy more than four units with that budget. The problem with four units is that each can only produce maybe $1,000 or $2,000 per month. And that’s only after you’ve done thousands of dollars in work around the units to make them rentable in the first place. That math isn’t difficult—there’s just not enough money to make it worthwhile.
That’s why you’ve got to go big from the start—with 16 units, minimum. Don’t buy less. Without 16 units, you can’t have a manager, and if you can't have a manager, you're going to either dedicate all your attention to the property or to your full-time job. To get 16 units, you will need to wait and save more money or use other people’s money (but you’ll need to learn how to sell).
The real-estate deals that look the prettiest and are easiest to find—such as buying a property that has a tenant and management in place, joining a crowdfunding website, or buying into a publicly-traded real estate investment trust—yield the lowest returns. The most profitable opportunities are the ones no one else knows about, which you find and create.
Due to a strong economy, high consumer confidence, historically low inventory levels, and extremely low interest rates, it’s the best time to flip houses in the past 40 years.
High consumer confidence and a strong economy give retail buyers the feeling that “now is a good time to buy” rather than retreat in fear and continue renting. Low interest rates allow retail buyers to purchase more of a home than if the rates were at historical average levels, like 6 percent. Low inventory levels create bidding wars by retail buyers, which increase the prices that investors sell their flipped houses for.
So, if you can find the deals before the competition, you can transform a little bit of money into a whole lot in a relatively short period by flipping houses.
If you’re seeking tax-advantaged passive income, thanks to the rise of the sharing economy and services like Airbnb and HomeAway, short-term renting of residential properties is producing the highest returns. (It’s not uncommon to obtain more than a 20 percent return on very nice properties in beautiful areas.) The majority of my real-estate holdings are now in short-term rentals.
Unfortunately, real estate is full of pitfalls. Getting educated through reputable online sources can help, but an article, book, or how-to video will be of little assistance in answering the most important questions you’ll have in the heat of a deal. That’s where the right real estate mentor becomes an invaluable resource.
Before throwing money away on the HGTV pipe dream, educate yourself! Don’t spend thousands of dollars on coaches and seminars. No matter how shiny they make it or how much you’re told you need an expensive education, you don’t. Information is inexpensive and plentiful. Find it or someone specializing in investment real estate, like me.
Holding assets is the way to build wealth through real estate. Shelter is a basic need. Dirt, in and around major metro areas, is a finite resource, and demand is constantly increasing. By owning a rental on that dirt, you have a small business that works to pay off your mortgage. Flipping is over glamorized, in my opinion. Rent and hold for the win.
Boomers and millennials want smaller housing, closer to cities. Additionally, real-estate investors commoditizing American suburbs and re-gentrification has pushed lower income families out. Because of this, America’s suburbs have seen a 57 percent increase of people living below the poverty level in the last 15 years. Buy your cities.
Don’t blow your budget. Most projects have surprises or overruns; it’s just part of the business. Keep a cushion for the unexpected. Lever your funds to increase returns and reduce risk. Start with one project. Get your model set, tweak, then buy two. Continue and progress until you build a solid portfolio.
Educate yourself, hustle, and create value. Take massive, determined action daily. Talk to brokers, call contractors, view open houses, and go to meetups. Learn! And when you’re ready, door knock! The best deal is the one that isn’t for sale. Find it, then find someone like me and close it down.
In building over $100 million in real estate, I've personally used three strategies many times.
One: Purchase a low-income property, typically for $35,000 to $55,000. Costs are low but yields are consistent. Hand over all management to a third-party company, and collect your monthly rent passively, bringing in annual returns of 8 percent to 10 percent. If you purchase two to three properties like this per year, you will have a portfolio of 20 to 30 in a decade.
Two: If you can fix things yourself, do a "live-in flip." Buy a house that needs a little work at a great deal; live in it for one or two years while you rehab it. Then flip the house for an appreciated value and profit. Doing this five times in 10 years could generate $300,000 to $500,000 net profit. That would let you buy your own house in cash! Or reinvest into rental properties, which would cover your cost of living anywhere in the world.
Three: Joint venture on a deal. People have money; they just need the right opportunity. Find a good deal and tie up the property with a contractual clause, pending financing approval within 30 days. Then find another investor to partner on the flip with you. Explain that you secured the property and just need the funds for a specific period, and the return will be split between you both.
Make enough calls, and you'll find a joint venture partner easily. Just ensure you correctly calculate the cost of rehab and expected sale price. Most people mistakenly underestimate the rehab cost and overestimate the sale price, killing their margins.
Source transactions that contain some core elements: they take the shortest amount of time to complete, and provide the maximum amount of profit while minimizing risk and the amount of cash you invest initially.
Before really embarking, solidify your A Team (advisors whose opinions you trust) and B Team (associates who turn the gears).
Once you have a plan, pull the trigger. Don’t just have a backup plan—ensure that even the most airtight scheme has at least five exit strategies. Experience has taught me that the winds of a favorable real estate market can shift rapidly; the last thing you want is to be anchored to a dozen unsellable investments.
Finally, know the difference between buying, holding, and trading. Buying is a no brainer, but it’s what you do with a property that determines your success. My primary strategy has been holding onto commercial real estate for the long term and trading out residential pretty quickly. Know your market.
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