Rental properties have made me a lot of money and built a ton of wealth for me as well. I have around 10 million dollars in net worth now which is mostly from my rentals. Not only can rentals provide monthly cash flow but they can build your net worth very quickly as well. I was surprised how fast I got to one million in net worth after I begin buying rentals and thanks to the many advantages of rentals it might surprise you how fast it can happen as well! Getting a great deal, mixed with smart leverage, and possibly appreciation can be a great recipe for success.
How many properties did I need to buy to get to one million dollars of net worth?
I bought my first rental property in 2010. I paid $97k for the house, which was a great deal, and it rented for $1,050 a month with very little work. I went on to buy two properties in 2011, there in 2012, three in 2013, and ended up with 16 by 2015. I was putting 20% down to buy these properties which came from using leverage from my personal house and rentals that had increased in value and my career as a real estate agent and flipper to get the money for these properties.
I was fortunate to buy at the bottom of the market but we did not know it was the bottom at the time and many people said I was an idiot for buying rentals back then. The market began to really increase in Colorado, where I was buying my rentals, in 2012 to 2013. My net worth was a little over $100,000 (mostly from my personal house) in 2010 and by 2013 I had increased it to more than one million dollars. Almost all of that increase was from rental properties!
It took me about 10 rentals to get to one million dollars in net worth. I spent about $35,000 on each of those rental properties when considering the down payments and repairs needed before I rented them. As I said, I did not have $350,000 in cash to invest, I refinanced some rental properties and my personal house to get much of that money to invest. I was able to save money and invest it into the rentals from my career and that amount was in the range of $100,000 to $150,000 over those three years.
How was I able to gain so much net worth from rental properties?
A lot of people only talk about appreciation when they discuss rental properties as an investment. Some people, who are often trying to sell other products, will say rentals only make 5% a year because that is how much housing prices go up a year. There are many things wrong with this statement and rentals make much more money.
- Cash flow: A good rental will make money every month once you subtract the expenses from the rent. I shoot for 15% cash on cash return, which is tough to get, but possible.
- Buy below market: one of the huge advantages of rentals and real estate is that you can get a good deal or buy below market. I can buy a $150,000 house for $100,000. Again this is not always easy, but it is possible
- Appreciation: Most real estate will go up in value over time. The last real estate crash was the largest in history and left a bad taste in many people’s mouths, but the last crash before that was the 1930s. Real estate historily goes up around 5% a year but has goin up more recently.
- Leverage: Leverage means you use loans or other people’s money in the real estate world. I can put 20% down on a rental property or even less with some statergies which means I multiply that 5% appreciation. An 5% appreciation could mean an increase in my investment of 30%, 50%, or even 100%!
- Loan pay down: When you get a mortgage on a rental property you pay off part of the loan every month. Over a few years, that loan gets smaller and smaller which increases your net worth more and more.
- Tax advantages: Rental properties have some amazing tax advantages as well! The tax advantages do not add to your net worth directly but they allow you to save more of your money which allows you to buy more rentals and a 1031 exchange allows you to sell one rental and buy another without paying capital gains tax.
How can one rental create $100k in net worth?
That first rental was a great property and it created more than $100,000 in net worth in the first few years I had it. Eventually, I went on to sell that property for $275,000 in 2019 and use a 1031 exchange to buy a $600,000 commercial property.
Here is the equity my first rental property created when I first bought it.
- Purchased for $98,000 with a 25% down loan (I used 20% down after this)
- Loan amount: $73,500
- Value: $135,000 (I always get a good deal)
- Repairs needed: $5,000
- Equity when first bought: $61,500
My $30,000 investment created $61,500 in equity or net worth as soon as I bought the property.
With this rental, I tried to pay off the loan as quickly as possible which I realized later was a mistake?. I had created much more than $100,000 in net worth with this property doing that, but I also bought fewer properties than I could have doing that as well. For this article, I am going to use numbers that assume I did not pay off anything extra.
How did the property look after three years assuming nothing paid extra?
- Value: $170,000
- Loan amount: $69,000
- Equity: $101,000
- Cash flow made: $15,000
As you can see the property increased in value while I was making money every month and the loan was paid down. Overall, the property had produced $116,000 in cash flow and equity from a $30,000 investment. Technically I used some of my money to create that $100,000 plus net worth but a year or two later with market increases and loan pay down I was well over $100,000 in addition to my $30,000 investment.
How can you scale with rental properties?
Many people will say that is great you bought a rental and made that much money but how do you keep buying them when it takes $30,000 to buy each one? After a few years, I refinanced many of my rentals.
Rental number 2 I bought for $92,000 in 2011 and spent $15,000 fixing up. By 2013 it was worth $160,000 and I refinanced it. You can usually refinance up to 75% of the value of the property. After a 20% down payment and a couple of years of loan pay down, I owed about $71,000 on this property. 75% of $160,000 is $120,000, which means I can get a new loan, pay off my old loan and have $45,000 leftover after paying loan fees.
After a refinance, I have less equity in the rental I refinanced but it allows me to buy more rentals, getting a great deal each time, and build more net worth. This is often called the BRRRR strategy. Not only do I have money from the refinance, but the property is bringing in cash flow as well each month that can be saved to buy more properties.
How many rentals do you need to create one million in net worth?
As you can see you can create a lot of wealth with rental properties. It is tough to say how many rentals you need to get to one million dollars in net worth since every rental is different and every person is different. You might be buying $250,000 rentals or $500,000 rentals or $50,000 rentals. I was also experiencing a very high appreciating market but I also got really good deals as well.
Time can also play a big factor in how long it takes to get to one million dollars in net worth. If you buy 10 rentals in one year, they may not have as much equity as 5 rentals bought over 4 or 5 years. Time is your friend when you invest in real estate!
If you buy the right rentals, which are great deals, with leverage, you can get to one million dollars of net worth with 10 rentals or less. I have commercial properties that have increased my net worth by more than one million dollars from one property!
Rental properties can be an awesome investment and certainly make much more than the appreciation rate of housing. They can create a lot of wealth relatively quickly and are my favorite investment tool. They also take more work to buy and are more to manage than other investments but it is well worth it to me!