The Five Ways We Make Money With Real Estate
CEO/Founder, Del Walmsley
“Let’s talk about the 5 ways Lifestyles Unlimited Members Make Money In Real Estate.”
Let’s talk about the five ways Lifestyles Unlimited members make money in real estate. I retired at 30 years of age and I’ve made more money every year since. The key to making more every year is having passive streams of income. Let’s say you have no cash flow right now. If we can get you out there to earn $500 to $1,000 a month on your first deal or two, that’s money in your pocket. But, you need to invest correctly so that you benefit from these five types of real estate returns.
Equity Capture
The number one way is through something called equity capture. Now, I need to explain this to you, because it is not something you would normally understand if you haven’t been around it. Equity capture is the fact that I can go buy a house worth $100,000 and it would appraise for $100,000, but I could still buy it right now for $80,000. So, I’m instantly making $20,000. Let’s say I put 20% down on a $100,000 house. That’s $20,000. I made a $20,000 gain on a $20,000 investment. That is an unrealized 100% rate of return instantly. Then, later you can capture that by refinancing or selling.
Cash Flow
The second thing that real estate offers is something called cash flow. Now, most of you think your investments pay you money, but I would differ with that. Most of you don’t have any passive streams of income. If there’s one thing that blows people away in my Two-Day Seminar, more than anything else, is when I ask them to take all their passive income from last year and divide it by their net worth. What they’re finding, which is true for everybody unless they are a real estate investor, is that they earn less than 1% a year on their net worth. Now, real estate investors earn much more than that because we are more leveraged, and we have much higher rates of return. But, you are in a situation where you have no cash flow. So, let’s think about your 401K. Could you go and live on your 401k? No. The reality is you pay money into your 401k every week. In fact, it’s negative cash flow each month. What does a 401k give you? Well, someday I can retire. What if you start doing what I said and in three to four years you actually can retire? You must have cash flow.
Mortgage Reduction
Let’s talk about number three. The third way we make money is almost a secret. It’s invisible! That’s mortgage reduction. You realize you have mortgages on all these properties and your residents are paying the mortgage down. It is not coming out of your cash flow – not coming out of your pocket. It’s coming out of the gross rent of your property. What you don’t understand is how much money that adds up to. Imagine that you were going to pay into your 401k $500 a month for 30 years; you end up with $6,000 a year. In ten years, that is $60,000. Now multiply by three. You’ve just paid out $180,000 of your income into your 401k over 30 years. What if you own 10 houses and your residents were paying off $500 a month for you, which totals $180,000 per house over that same 30-year period. If we are talking about 10 houses, that’s $1.8M in debt reduction your investment provided you.
Appreciation
There is another way we make money, and this is probably the most commonly thought of way to make money in real estate. It’s called appreciation. The people out there that own stock compare the appreciation of real estate to the appreciation of the stock market. But, it doesn’t even come close. Now, your financial planner will tell you that your rental home only provides you about a 3% return a year in terms of appreciation, but they’d be wrong. Why? Let’s say you’ve bought a $100,000 home and it goes up 3% in a year. If you only came out of pocket $10,000 using leverage, the way we teach you to invest, that’s a 30% return in a year, not 3%.
Tax Advantages
The fifth way we make money is tax advantages. Now this one’s almost impossible to believe. If you line up your depreciation with your incomes correctly, you’re going to be able to write off massive amounts of your rental income. In many cases, the depreciation exceeds the income from your rental property giving you tax-deferred income. Sometimes the excess depreciation can even be used to offset some W2 income within certain income limits. This is really the secret to what we do because when we have tax-deferred income, our returns add up much faster and we’re able to retire on much smaller amounts invested.
It’s About the Lifestyle
The bottom line is that when we do this correctly, we are getting these five types of income coming to us every single month, every single year, to build our wealth and increase our cash position. The 401k and the paid off personal mortgage do not do this. Everybody goes to work to earn a fixed amount of money coming in on a regular basis. My goal for you is to understand it’s not about a little bit of money, it’s about a complete lifestyle.
