Real estate done correctly can make you very wealthy.

Sure, this might sound like the promise of a late-night television salesperson trying to get you to attend the latest “free seminar,” but the reality exists: real estate is a powerful wealth building tool that has made millions of individuals millionaires and very rich.

Could you be next?

Maybe, but here’s the catch: not everyone who buys a piece of property becomes rich. In fact, many people buy real estate only to find stress and empty bank accounts. They struggle for years and years but never build the kind of wealth they’ve dreamed of (or the riches promised by the late night TV guru.)

So how does someone use real estate to truly become a millionaire?

There are four primary “wealth generators” at play when you invest in real estate, depending on the strategy you get into:

CASH FLOW

This is the extra income you’ll get to keep each month (or year) that you own the property. Cash flow can be deceptive because it fluctuates when certain repairs are higher or lower in different months, so it’s important to factor in non-monthly costs like vacancy (the amount of time the property sits vacant), repairs, capital expenditures (expensive projects that need to be replaced on a home every so often, like appliances, roofs, windows, plumbing, etc.), along with the regular expenses (utilities, management, etc.).

APPRECIATION

When the value of a property increases, we call this “appreciation.” While appreciation is not always guaranteed (just ask people who bought in 2005 and sold in 20008!), over time, historically, real estate has always increased in South Africa, averaging 3% per year over the past century. Another type of appreciation that can come into play is known as “forced appreciation,” the concept of increasing the value by physically improving the property.

LOAN PAY-DOWN

When you buy a property with a mortgage, each month your loan balance decreases. This means, over time, your tenant is essentially paying the loan down for you, helping you build wealth automatically. To make this concept clearer, pretend for a moment you owned a property that you bought for R1, 000,000 with a mortgage for R800, 000, and it made R0 in cash flow (it “broke even”) and never climbed in value. However, after that twenty-year mortgage is paid off, you’ll now have a property worth R1, 000,000 that you didn’t actually save for. Your tenant paid it off due to the “loan pay-down.”

TAX BENEFITS

The final wealth generator from real estate are the tax benefits associated with owning investment property in South Africa. The South African government likes real estate investors and uses the tax system to encourage our purchase and leasing of properties. From extra tax write-offs to Urban Development Zone allowances and more, real estate investors can pay significantly less tax than other business owners, using the extra cash to buy more properties or pay of the loan faster, helping to build greater wealth.

Of course, just buying some real estate will not give you all of the above benefits. Different strategies in real estate will give you different benefits. For example, when you “fix and flip houses,” you are most likely not paying off a loan, thus you will not get the benefit of the “loan pay-down” nor are you getting cash flow or many tax benefits. Instead, flipping relies mostly on the “forced appreciation” you get by fixing it up.
One of the reasons I love buying rental properties so much is because they may capitalize on all four of the wealth generators if you buy right.
Let’s use a quick example:

“Jenny wants to build wealth through rental properties. So jenny finds a property for R550,000 in her neighbourhood. After running a careful analysis, she determines that it is a good deal. Jenny uses a R50,000 down payment wherein she partners with the property boutique, it costs her no money down and obtains a 20-year loan for R500,000. The units brings in R7,000 per month, but expenses average just R6,500 per month, leaving them with R500 per month in cash flow, which increases each year as rents climb with inflation. Although that income is taxed, they don’t have to pay any because of the depreciation deduction on the property, thus part of the tax benefits of owning it. Over the next 20 years, the value of the home increases to R1,100,000 (a 3% per year increase due to appreciation). Finally, each year during those 20 years the loan has been paid down, and they owns the property free-and-clear. They now have an asset worth R1,10000,000, plus making thousands per month in cash flow.”

This example is not “pie in the sky” — this is a real life scenario when you buy the right deal and utilize all of the four wealth generators. Imagine what Jenny’s net worth would be after 20 years if she had purchased two properties — or four, or twenty of them early on.

Now, of course, no one wants to wait 20 years to become a millionaire. So how do you speed up this process?

WELL, THERE ARE A FEW WAYS YOU COULD SPEED THIS UP BY PARTNERING WITH US YOU ARE EXPOSED TO THE VERY BEST OF THE FOLLOWING:

Get the best deal

In the example with Jenny above, what if she was able to negotiate stronger and get that same home for R300,000 instead of R450,000? This would supercharge her growth.

Buy more deals

Jenny could have also purchased more properties. Perhaps she would buy one each year.

Buy in appreciating areas

While I used a 3% average for appreciation, Jenny could have researched job growth and other growth indicators to find an area where appreciation would be higher, perhaps 5-12% instead of 3%.

Force appreciation

Jenny also could have purchased a fixer-upper property that she could improve, increasing the immediate appreciation on the property. For example, maybe she could buy it for R150,000, put R80,000 of work into it, and it might be worth R575,000 at that point. This could also increase the speed at which her wealth would build.

Trade Up

If you are familiar with the board game Monopoly, you’ll know the value in trading from four houses to a hotel. The same is true in real estate. Jenny could upgrade to bigger/better deals every few years to maximize her return. This is perhaps one of the fastest ways to achieve wealth through real estate.

THE ROAD MIGHT BE FOGGY — BUT IF YOU JUST KEEP MOVING AHEAD WITH US AS YOUR PARTNER, MORE OF THE ROAD AHEAD WILL BE REVEALED.

I’ve only just barely scraped the surface on what real estate investing can do for you in your quest to become a millionaire. In fact, there are so many different paths and strategies you could take to become a millionaire through real estate that I could write many books on the topic and never cover it all. You could spend your whole life learning about real estate and never learn it all. And that often becomes a problem! People get stuck in “education mode” and never escape it.

I’d encourage you to not get overwhelmed, not try to learn everything. Pick one niche (like single family houses, commercial properties, etc.) and one strategy (like rental, flip, etc.), and focus on that. Read one or two books on the subject, and then start moving! Find someone local like THE PROPERTY BOUTIQUE to partner with and thereby exponentially increase your chances of success. Ask for help, but don’t stop moving!