Photo – Ben Riehle CEO/Co-founder of Apex Real Estate Network on a coaching session. Ben explains the 5-Year-Plan and goes over several properties and the key numbers that will result in the best returns with a new investor.
5-Year Plan to Build Massive Wealth
Detailed how-to strategy and the effects on your net worth
By: Ben Riehle, CEO/Co-Founder Apex Real Estate Network
The average home-owner has a net worth that is 44 times higher than someone who rents. Would it be life changing if five years from now you had built a portfolio of 3 investment properties? Have you thought about how this would affect your net worth? What about the freedom that financial security would provide? In this post, I am going to discuss a detailed strategy on how to bring this to fruition, and the effects it will have on your net worth. We are going to set a few assumptions for ease of numbers.
The assumptions are:
1. You have $5,000 saved
2. Each year you save $10,000 outside of Real estate
3. The purchase price is $150,000 for each property
4. FHA loan used for the first property (3.5% to 5% down)
5. Additional properties are purchased at 20% percent down
As stated above this home is purchased with an FHA loan at with 5% down ($7,500) and the principle of the loan for $142,500. I want to make it clear, that this is not your dream home. This home is to start the flywheel of financial freedom and allow you to live rent-free. You are going to have to suffer a little at the beginning of this journey. How can I live rent free? The most common way is buying a multi-unit, (duplex, triplex, quadplex) live in one unit and have your mortgage paid by the other tenant(s). This is commonly referred to as “house hacking”. If you live in a market that does not have reasonably priced multi-unit properties available, another option is to purchase a larger single-family home (3+ bedrooms). You can live in one of the bedrooms and rent the other to cover the mortgage. “I don’t want to live with roommates” which is understandable, but as I said before, you may have to suffer a little bit on this path to building wealth. At 18 years old I purchased an SFH in Tucson, AZ. I lived in an RV in the backyard with my three brothers as we worked on preparing the home for the school year. I rented rooms to two 30-year-old career women, which made for a less than ideal living situation for an 18-year-old freshman in college. Although less than perfect, this living situation allowed me to live rent-free. The mortgage payment breaks down for this home is as follows: (The numbers may change due to interest rates and other factors)
Taxes, as shown above, are property taxes; the bank wraps this into the mortgage to protect their interested. The insurance is for your asset and liability protection. PMI stands for Principal Mortgage Insurance. Because the Federal Government ensures the FHA loan, you must pay a monthly fee. That is the price for the ability to purchase a home for 5% down. In the first year you will pay $2,332 to the principal pay down, and $6,032 in interest. The good news is, if you have people renting rooms in your home or other units, you are not paying anything, they are. That means the 4% appreciation (4% is the average appreciation and can change throughout different markets) is on the purchase price, not your down payment. Which means you are receiving 4% return on the $150,000 purchase price. At the end of the first year, the home price would appreciate to $156,000. You will have $15,832 of equity built up (down payment + principle paydown+ appreciation). Living rent free will allow you to save $500 a month ($6,000 a year). Additionally, in this first year, you will need to save $10,000 outside of real estate, you need to continue to grind and hustle. Your end of year bank account balance is $13,500.
After the first year, the flywheel of financial freedom has started to spin easier. In year two you begin preparing for your second purchase. Another year of living rent-free brings your total saving from not paying rent to $12,000. Year two property value with appreciation of 4% is $162,240. (Again, I want to point out that the home is rented, and you are gaining this appreciation on the Purchase price. Appreciation is often forgotten about but can have a considerable effect on your net worth) Principal pay-down of $2,436, At the end of year two, you will have total equity of $22,072. (Again this is down payment + principle pay-down+ appreciation) In this year, you are saving an additional $10,000, which will give you the ability to purchase your second home in year 3. I want to make it clear that this $10,000 is saved outside of real estate. You are still hustling, finding ways to make additional income. (I worked as a parking lot attendant, to help increase my income while I was going to school at the University of Arizona. Today, my company is facilitating a deal to purchase that same parking lot, but that’s a story for a different day). At the end of the second year your bank account is $29,500, and ready to purchase your second investment property.
Congratulations, you are about to purchase your second investment property. Acquiring the investment with a traditional 20% down payment. Again, we are assuming the purchase of $150,000, down payment of $30,000. The principal loan amount is $120,000. We assume that you will net 500 per month after all expenses on this property. As a result you are now earning rental income of $4,800 a year. You are also saving $6,000 per year by not paying rent. Principle pay down for both homes in year three will be $4,669, your total equity will be $69,490. Both homes are appreciating at 4% each year, bringing the home value of the two properties to $168,730, and $156,000 at the end of this year (At this point you are now receiving appreciation of 4% on $300,000 each year). The break down for the mortgage payment for this second home is:
(Key point to note is that this mortgage payment is $273 less than the first home. The property was purchased as an investment property with 20% down payment, and you no longer have the PMI. The ability to buy your first property with 5% is critical to getting started without a significant amount of capital. As you can see purchasing your first property the traditional way can significantly decrease your mortgage payment. Factor this in when you start to decide to invest in real estate.)
Saving another $10,000, outside of real estate, for a year-end bank account of $20,300. At this point you are now in the driver’s seat, you have saved $30,000 in the last three years outside of real estate. You have a two home real estate portfolio, have $69,490 of equity, and $4,800 of passive income. You have also saved $18,000 from not paying rent. Real estate is one of the only investments where you can gain a return on someone else’s money. A critical fact that can be overlooked is that the equity you’re building is a piggy bank that will return to you when you sell the homes or refinance in the future.
Year four is another year of saving. You are still receiving $4,800 of rental income per year. Saving $6,000 from not paying rent, and have principle pay down in year four is $4,897, and your homes have appreciated to $ 175,479 and $162,240, bringing your total equity to $74,387. You will need to save another $10,000 to be in the right financial position to purchase your 3rd home in year 5. Your year-end bank account is $41,100. In year four you have saved $40,000 outside of RE, you have saved $24,000 from not paying rent. The flywheel of financial freedom is starting to turn now, and you are in the position to purchase your third property.
You are now in a position to purchase your third investment property. Again, you will pay the $30,000 down payment and take a loan of $120,000. Again you are purchasing a property that should generate a return of $400 per month after all expenses. This year’s principle pay down is $7,501, your properties have appreciated to $182,489, $168730 and $156,000. At this point you have equity of $155,607. Yearly rental income of $9,600. You continue to save $6,000 a year from not paying rent for a total saving of $36,000. You have saved 60,000 dollars outside of real estate. $21,579 of principal pay down, that your tenants have paid. Your net worth is increasing $42,845 per year, and you have created the economic habits to repeat this process as many times as you want. My hope with this post is to show you that although “Financial Freedom” appears to be a distant fantasy, the reality is that through purposeful action you can be well on your way within 5 years. It is not easy and there will undoubtedly be setbacks. That being said, in my opinion, the biggest mistake you can make is failing to take action and begin the process of building wealth immediately. Now, go take purposely action to create a life of financial freedom!
SIGN-UP TO HAVE A PROFESSIONAL REALTOR CONTACT YOU
TO DISCUSS BUILDING WEALTH THROUGH REAL ESTATE
Follow, Like, Share and stay engaged with us throughout social media.