Though there are many ways for investors to get started, the approach described below will work. It is a strategy described by William Nickerson in his best selling book 'How I Turned $1,000 into Three Million in Real Estate in My Spare Time'. If followed precisely, you will succeed in building a real estate portfolio worth over a million dollars if you follow this strategy.
Pro tip: You’ll stack even faster with the help of other real estate investors. Join the BiggerPockets Forums to find investors in your area—and other pros that can answer your toughest questions! The importance of diversification. At this point, you’ve got a lot of money tied up in real estate.
Step 1: Increase Your Earning Power. Obtain a college degree, advanced degree or certification course.
Step 2: Save. Save 20% or more of all that you earn. Over time these savings will grow quickly. Read the 'Richest Man in Babylon' by George S. Clason if you need encouragement.
Step 3: Learn About Real Estate. Read every book you can find on real estate investing, join an investor group, or take some courses and obtain a real estate agent or brokers’ license
Step 4: Acquire Your First Property. Once you have $20,000 in your savings account, use this money as down payment to buy a rental house for $100,000.
Requirements:
(a) Must be located in a market with strong population and job growth
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(b) You must time purchase to be in expansion phase of the market cycle
(c) Must be bought for below market value
(d) Rental house must cash flow after all expenses (ex. 7% vacancy allowance, property taxes, insurance, HOA, maintenance, mortgage). If you’re unsure you’re calculating it correctly, download, the Annual Property Operating Data (APOD) template.
This is your first cash generating machine. If every property meets the qualifications above, it will make it easier and easier to acquire your next one.
Don't think it's possible to locate these types of properties? It is possible in this market right now! Tip: Look nationally.
Step 5: Cash Out Refi. Once the value of your property has appreciated to approximately $165,000, call your mortgage broker and refinance the loan at 80%. The bank will send you a check for $52,000 ($132k-$80k). This money is tax free as it is technically a loan, but you will use it to acquire additional cash flowing properties.
Step 6: Acquire Two More Investment Properties. All properties must meet the requirements above. You will now own three cash flowing investment properties located in appreciating markets.
Step 7: Cash Out Refi. Once the value of your two new investment properties property has appreciated to approximately $165,000 each, call your mortgage broker and refinance the loan at 80%. The bank will send you a check for $104,000 (2 x $132k-$80k).
Step 8: Acquire Four More Investment Properties. All properties must meet the requirements above. You will now own seven cash flowing investment properties located in appreciating markets.
Step 9: Cash Out Refi. Once the value of your four new investment properties have appreciated to approximately $165,000 each, call your mortgage broker and refinance all loans at 80%. The bank will send you a check for $208,000 (4 x $132k-80k).
You have reached the Fannie Mae bank loan limit (ten loans). Thus, you will have to either (a) get a relative to put future loans in their name while you put all money down, acquire, manage, and collect the cash flow from the property,(b) find a portfolio lender (bank that services their own loans), or a (c) securitizing portfolio lender.
Step 10: Acquire Eight More Investment Properties OR acquire an apartment building. All properties must meet the requirements above. You will now own seven cash flowing investment properties located in appreciating markets.
Remember, as an investor you are providing a valuable service for paying customers, your tenants. You are providing clean, well taken care of home rentals to families that need them. So, treat your tenants well and they will stay in your properties for long periods of time and will pay you well for it.
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Jon Strishak is founder and managing partner of Alegria Capital Management, a residential real estate investment management company that invests in high-growth developing U.S. markets nationwide. These are cities that are affordable, are expanding at a rapid pace, have a great mix of job diversity and culture, and have tremendous population and job growth. To learn more, please visit www.alegriacm.com