Seeing people with 50 million up to hundreds of millions of dollars in net worths all in real estate, how does that work exactly? Do they just buy properties and flip them? Are they real estate brokers or do they just get lucky that the property increases in value?
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First, understand real estate, like a lot of investment avenues that seem easy to get rich quick, is full of bullshitters and charlatans. A lot of them. So always take people with a grain of sale when they talk about just how filthy successful they are in real estate. Not that there aren’t successful investors – there’s plenty of those too.
Real estate allows you to leverage (borrow against) in order to keep growing. So you buy a house for $100k, pay $50k back to the mortgage, and the houses value increases to $150k. Now you’ve got $100k in equity (the amount or interest you own in the house) to invest in another property, while still reaping cash flow from the first one.
Keep doing that over and over and you’ll eventually have yourself a nice portfolio.
There’s also a number of different programs that let you buy properties and flip them without having to pay a ton of money from the beginning (like a FHA 203k). So it’s attractive to a lot of people who don’t have money upfront to invest but think they can make a profit getting into the flipping business. If you’re really stupid – you take out a bridge loan from really wealthy people – basically a loan that has no to low payments for the first year (or a certain time) then balloons with a high interest rate. The idea is that you’ll use the money to finish the project, either convert to a traditional mortgage or sell it for profit, and pay off the original loan. But what happens is a lot of people default on the loan because of project delays, higher costs than expected, or market downturns or the return was much lower than expected, and the bridge lender now has you by the balls and will absolutely ruin your life.
I represented bridge lenders for a while. Really wealthy people don’t flip houses. They invest in REIT (real estate trusts) or cooperatives that lend money to flippers and then collect against defaults.
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