Becoming a millionaire may not mean what it once did thanks to inflation and the cost of living. However, being a millionaire is still a big deal, and only 5 percent of American households have a net worth of one million dollars or more. I strongly believe that real estate is one of the best ways to achieve wealth. Rental properties in particular are an awesome way to build net worth and create passive income. How long does it really take to become a millionaire with rental properties?
How many people are millionaires in the United States?
According to: https://www.cnbc.com/amp/2016/03/07/record-number-of-millionaires-living-in-the-us.html, about 5 percent of US households are millionaires. While one million dollars in today’s money is not worth as much as it once was, only 1 in 20 households achieve that status. One million dollars in 1985 would be with over 2.2 million dollars today. One million dollars in 1942 would be worth over 15 million dollars today.
How millionaires are defined can also change the numbers. Some sources do not count a personal residence for purposes of net worth. I think the equity in a personal house should count as net worth. One person may have bought a $800,000 house with cash while someone else bought a $200,000 house with 100 percent financing. Obviously one person is better off than the other in regards to their personal residence, and it does not make sense to ignore the massive asset they own free and clear. I think anyone that has accumulated a net worth of at least one million dollars should be considered a millionaire. Net worth would be calculated by subtracting all your liabilities or debts from all your assets.
While being a millionaire is not as rare as it once was, there are still very few people who ever become one. I think being a millionaire is a great goal to have. If you become a millionaire you can create bigger and better goals, because just having a net worth of one million dollars does not automatically make you rich or carefree. If all your money is tied up in your personal house, it is not making you any money or providing much security. The nice thing about rental properties is they provide income every month and security.
How much net worth can you build with a personal residence?
I will talk about rental properties and how they build net worth soon, but a personal residence can also build a lot of wealth. I have increased my net worth buying and selling houses that I lived in. It is not easy and you cannot buy any house from the MLS and hope it goes up in value.
I bought my first house when I was 22 years old. I paid $190,000 for the house, which was full retail value for it. I lived there 7 years and spent at least $10,000 on materials to remodel the home. That money does not count the time I personally spent updating bathrooms, painting, installing fixtures and fixing many other small things. I sold the house for $180,000 after doing all that work! It did not help that the market dropped, but I could have done much better if I would have been patient and waited for an awesome deal.
I bought my second house from the foreclosure sale for $215,000, put less money into it for repairs, and sold it for $343,000 three years later. I bought the house with money I borrowed from my sister and father in law because I had to pay cash at the foreclosure sale. I was able to refinance all of that money out with a conventional bank a couple of months later. The awesome part about making so much money on that house was that it was tax-free. I took that money and used it for a down payment on a house I purchased for $560,000 in 2013. I have owned that house for over three years and it is worth more than $800,000 now. I was lucky that our market has taken off, but I also focus on getting great deals on all the houses I buy. My loan on my personal house is around $415,000, which means I have created over $350,000 in net worth through my personal residences.
I have not become a millionaire through these houses, but they have definitely helped to grow my net worth. When you buy a house as an owner occupant you can put very little money down and any profits you make are usually tax-free if you live there for at least two years. If you do not have a lot of money to invest in rental properties, buying a personal residence is a great way to start.
How can rental properties make you money?
The biggest increase to my net worth came from rental properties. I always buy properties below market value, which creates instant equity. When I buy a rental property for $120,000, it may be worth $160,000 or more after spending $15,000 to fix it up. When I buy that property and fix it up, I add $25,000 to my net worth. I have 14 rental properties now (I had 16 until I sold a couple) and all of them have added money to my net worth in multiple ways:
- Buying below market value. Every time I buy a house it increases my net worth because I get a great deal on the home.
- Appreciation thanks to our hot Colorado market. I would not count on appreciation, but it is a nice bonus.
- Cash flow I collect every month. My 14 rentals make me about $7,000 each month from the rent I collect after all expenses.
- Tax advantages. You can deduct or depreciate almost all the expenses on rentals and even depreciate the building for great tax savings.
- Equity pay down. I have loans on all of my properties except for one. Every month I slowly pay down the loans on those properties, which equates to thousands of dollars a month.
All of these factors have increased my net worth directly or given me more cash, which allowed me to invest in more properties and add to my net worth. Rentals did not make me a millionaire overnight, but they have been an awesome investment and made me a millionaire eventually.
How long did it take me to accumulate one million dollars in net worth?
I bought my first rental property at the end of 2010 when I figure my net worth was about $180,000. I had been a real estate agent for 8 years, and flipping houses with my father for many years, but had not accumulated a huge amount of money. I invested money in the stock market, but most of my net worth was in my personal house.
I ended up getting to one million dollars in net worth in 2013. At the time I had seven rental properties, which had contributed greatly to my net worth. Not only did buying below market value, and appreciation increase my net worth, but I was saving as much money as I could to buy rentals. I put 20 or 25 percent down on each property and made repairs to most of them. Here is what a typical rental looked like:
- Buy for $100,000
- Put down $20,000
- Spend $15,000 on repairs
- When I was done the house was worth $150,000 to $160,000
After buying and fixing up the rental I had a house that was worth $160,000 with a loan that was $80,000. After a couple of years that house increased to $180,000 in value and my loan balance decreased to about $77,000. For each of my rentals I gained $100,000 or more of net worth after a few years of ownership. On some of my houses I built much more net worth because I got really great deals on the property. That does not count the cash flow I earned each month, which was about $500 per month, per property.
Some of my net worth was from my personal residence and other investments, but most of it was from rentals. It took me about four years to accumulate a net worth of one million dollars from just rentals. While it took cash to buy those properties, it forced me to save money as well. I know I would not have saved as much had I not been buying rentals.
How long would it take someone who could not buy properties as fast as I did?
My story may not be relative to many people. I have a successful real estate sales team, a successful fix and flipping business, and a blog that makes money as well. I have had extra money to invest in rentals to increase net worth. Even if you don’t have a lot of cash to invest, you can buy real estate. You can buy houses with little money down as an owner occupant, and with many other strategies. You could turn owner-occupied houses into rentals or sell them, collect tax-free profits, and re-invest it into more properties.
You may not be able to buy as many rentals as I did as fast, but you can definitely start building wealth. How fast it takes you to reach one million dollars in net worth depends on many factors like:
- How much cash you have to invest
- How good of a deal you get
- How many houses you buy
- How fast your market appreciates or possibly depreciates
- What strategies you use you to accelerate growth like refinancing, house hacking, or the BRRRR method.
It is possible to build a net worth of one million dollars in a couple of years with real estate. It also may take five years, ten years, or even fifteen years. Only five percent of households are millionaires so even if it takes a while you will be ahead of the pack. It may be tough to get your first property, but the more you buy the easier it gets and the more money you will make.
For more information on investing in rentals properties including how to get a great deal, how to know what type of property to invest in, how to rent your property, and how to buy multiple properties quickly, check out: Build a Rental Property Empire: the no-nonsense book on finding deals, financing the right way, and managing wisely. The book is a best-seller on Amazon and comes as an eBook, paperback, or audiobook. If you have not signed up for Audible yet, you can get the audiobook for free here: Audible.