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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The basic answer is using leverage and good debt to snowball value of real estate holdings…
Say somebody starts out buying a $500k rental property. They put down $100k (20%) as a down payment and have a mortgage for the remaining $400k. Their tenants pay rent, which then goes to pay the mortgage, paying down the debt and building equity. Additionally, all gains in property value go to the investor. So let’s say 5 years later, the building is now worth $600k, and loan has been paid down to $350k. The investor could sell, and that would have turned their initial $100k into $250k. They could then use that $250k to buy a building worth $1.25m, collecting higher rents to pay the higher mortgage. And maybe a few years later, the building is worth $1.75m, seller now has $950k is equity ($250k down payment, $500k in value appreciation, $200k in loan paydown). Now he’s got almost $1m to use to buy a $5m property!
But landlords don’t even need to sell to upgrade. They can also borrow against their equity, and use that to acquire more properties. Maybe instead of selling the building for $1.75m, he borrows $500k in equity and buys another $2.5m building, bringing his buildings’ total value to over $4m. While there are mortgages and debt on those buildings, the tenants’ rent payments are paying down those loans.
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