Submitted by neverever1298 t3_yenyv5 in explainlikeimfive
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?
Complicated answer with lots of paths, but generally real estate appreciates if managed properly. These folks usually also own commercial, which is heavily tied to rental income.
Let’s say you put up a down payment and finance an underperforming 20 unit strip mall in a decent part of town for $100,000 with only one tenant paying $10,000 a year. You market the property and get 14 more tenants paying $10,000 a year, the value will increase dramatically.
Now refinance the property, and take advantage of tax benefits, and do this again 5 times. Now package your portfolio and do this same concept with portfolios of properties.
Over time you will have enough cash flow and assets to get any loan you want, and can make the same or new investments with relative ease.
I don't think a five year old knows what refinancing to take advantage of tax benefits is, or packaging a portfolio. Other than the 3rd paragraph it was easy to follow though.
You never know. Kids these days understand way more than what we used to do.
> "LI5 means friendly, simplified and layperson-accessible explanations - not responses aimed at literal five-year-olds."
This is from the /explainlikeimfive/ rules; the OPs response is fine.
OP asked how people get rich with real estate; I doubt they (or the average person who does not have an asset portfolio) knows what refinancing actually is, or what packaging a portfolio is.
Me referencing an actual five year old was just tongue in cheek.
The fact that two technical terms appear in a sentence that basically says "Rinse and Repeat" does not suddenly make it inaccessible.
Real estate lets you leverage a lot. So if you have $1 million in equity from an existing property, you can borrow against that $1 million, and put a down payment on a $5 million property.
Assuming your cash flow can cover monthly costs, then you will eventually gain back equity on both properties, and then borrow more money to buy an even more expensive property.
Leverage lets you grow a business faster than normal. The downside is that, if you run into a cash flow interruption, you're more at risk of losing everything
Not to mention that real estate makes for lovely collateral and people are more likely to be willing to allow you to leverage using it.
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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One way is leveraging. Build a large portfolio quickly so as to spread risks and exposure to any one property becoming a loss.
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.
zgrizz t1_itz0xn1 wrote
Also in the mix, many of these people have obtained their own real estate licenses, and are able to broker their own transactions, making them much more profitable.