4 Steps to Becoming a Real Estate Millionaire

People have invested in real estate for hundreds of years to build wealth. Buying real estate doesn’t guarantee you’ll be rich, but real estate investing is a powerful wealth-building tool. 

The road to becoming a real estate millionaire can take many paths based on your strategy, market and goals. No two paths are the same, but many of the steps can be duplicated to achieve the same result. Here are four steps you can take to become a real estate millionaire.

4 Steps to Becoming a Real Estate Millionaire

No matter your real estate market or real estate strategies, the following four steps can help you along the road to becoming a real estate millionaire.

1. Start Small, Think Big

You may know that it takes money to make money in real estate investing. While true, you can enter the real estate market as a beginner with limited funds. Several real estate investing strategies – house hacking, buying fixer-uppers or starting with small rental properties – don’t require you to have a lot of money up front.

You may not want to live with a tenant. However, house hacking – buying a single-family home and renting a room or buying a multiunit house and renting out the other units – is an inexpensive way to get started in real estate. While it might not be ideal for you, consider that your tenants are paying your mortgage while you gain equity and income.

If you choose a fixer-upper, look for undervalued homes. This method requires you to have money for the down payment and renovations. But the upside is that you’re accruing equity while you live in your construction zone and not paying rent.

When you are new to investment properties, consider starting small. Perhaps your first rental property won’t be big enough to command rents to make you a millionaire right away, but it gets you started on the road with a process you can replicate.

2. Leverage Other People’s Money

Unlike some other investments, real estate draws more favorable attention from lenders because the property is typically the collateral. If you default on a loan, the lender can take over the property.

If you’re buying a home for yourself, even if you’re house hacking, you can qualify for an FHA loan, which requires a down payment of 3.5%. If you are house hacking, keep a multiunit house to four or fewer units to qualify for an FHA loan. Of course, you must meet income and credit requirements, and the property and its location will factor into the loan.

If you don’t qualify for a traditional mortgage or need to borrow to fix and flip a home, you can seek a hard money loan from a private lender. This type of loan is easier and faster because it is secured by the property you’re purchasing. 

Expect a higher interest rate, higher fees and a short-term repayment period. Factor these costs into your purchase. You can use the money to purchase and repair a home, then sell it and use the proceeds to repay the loan.

Other ways to leverage someone else’s money for a real estate purchase are seller financing and partnerships. Seller financing is just as it sounds: The seller of the property loans you the money and you make loan payments to the seller at an agreed-on interest rate and term. In a partnership, you pool your money with other investors to purchase a property.

By using leverage to finance a portion of your real estate purchase, you can gain equity while rents pay down your loan. Then, use the money earned on the property to buy other properties.

3. Build a Steady Cash Flow

Cash flow is critical to real estate investing because it determines the financial performance of the property and the potential returns you can expect. You have positive cash flow if your property generates more income than your operating expenses. Negative cash flow is the reverse.

You can calculate the net operating income (NOI) – the gross rental income minus operating expenses – to evaluate a property’s potential profitability before factoring in financing costs. By dividing the NOI by the purchase price, you can calculate the capitalization rate, a key metric for real estate investing. The higher the cap rate, the higher the potential for the property to be profitable.

A thorough analysis of the property can help you avoid negative cash flow by ensuring you don’t overpay for it. You can also avoid negative cash flow by attracting reliable tenants to keep down vacancies. Finding good tenants, maintaining your property and staying on top of market trends can help you maximize your passive income.

4. Scale and Diversify

Even if you start small with an investment in a single-family home, you can grow your real estate portfolio over time. Scaling from that single-family home to a multifamily quadplex or commercial real estate, such as an apartment building, can spread your risk across diverse property types and increase your potential return on investment.

You can further spread your risk by diversifying by geography. One strategy to grow your portfolio is the BRRRR method (buy, rehab, rent, refinance, repeat). BRRRR calls for buying distressed property and rehabilitating it by making repairs to meet rental standards. You then rent it to tenants at a rate that covers the cost of acquiring and owning the property. 

Then, you refinance the loan on the property at its after-repair value (ARV) and use the money to repeat the process over and over until you’ve acquired the number of properties you want to own.

Before using BRRRR, you should learn a lot, including what type of property to buy and repair, how much to pay for it, what constitutes a good deal, how to determine the ARV and more. You also need a lot of money for the purchase and rehab.

Take Your First Steps Toward Becoming a Real Estate Millionaire

Investing in real estate has made many millionaires. Like any other investment, real estate investing has risks and no guarantees of success. However, the benefits of real estate investing – appreciation, tax advantages, leverage and cash flow – can put you on the road to becoming a real estate millionaire.

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