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⛰ How do some make billions in real estate?


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Real estate has created many millionaires but only a few billionaires. When studying these billionaires, you'll notice they leverage three key strategies unique to real estate that, when combined, can lead to explosive growth. Let’s dive into these strategies without delay to keep this newsletter concise.

1) Forcing appreciation a.k.a value add

Think about flipping a property: you put in $20k to buy a broken house, rehab it for 5k and instantly increase value by $20k or $30k. Now imagine applying the same concept to an entire multifamily building: 10 units, 20 units, 50 units, 100 units. You can rehab or just improve operations like increase rent or decrease costs.

Whatever you do will increase the value by a multiple because there will be more cash flow.

Eg, Let's say you purchase a 50-unit apartment complex. By modernizing the units, introducing amenities, and implementing efficient management practices, you can increase rent by $100 per unit. That's an extra $5,000 per month or $60,000 annually. The property's value balloons not just by this amount, but by a multiple of it, due to the enhanced annual cash flow.

The holy grail opportunity is ground-up projects. They are opportunistic, so they are also riskier. But if you have the right experience and staying power, you can double your money every 2-3 years; then, you will get to staggering numbers very quickly.

Now folks who rely on appreciation to get rich are hoping for the same, but without the work; however, they are relinquishing control to the market. They hope interest comes down and inflation goes up to push values higher and higher.

Or you can take action yourself to push values higher and higher, like in the previous example, which is what I prefer.

One of the best advantages of real estate is having control over the property, which is not the case with stocks, where you rely on others to manage the business.

2) Easy access to debt

Real estate is generally considered a risk-resilient instrument. Chase or Wells Fargo will not give you a loan to buy their own stock but they will for buying real estate.

If the bank will loan you 80% of the value, your returns are higher. 10% unlevered becomes 20% levered. You put less money in the deal, which enables you to buy a bigger deal or spread your cash across many deals.

The more money you show, the more money the banks will give you. You get better loan terms and better interest rates.

On top, when you improve operations or do rehab to increase value, then you can refinance the property and pull cash out to invest in more deals.

No one has seen compounding until you see how it works in real estate.

But as easily as debt can increase wealth, a mismanaged debt, especially in downturns, can cause a death spiral. Zeckendorf and many others are eerie reminders.

So one has to be intentional about their debt strategy. I talk a lot about it and present frameworks to mitigate risks in the supermode community.

3) Tax Code

1031 exchanges are practically magic. Instead of selling the property and paying taxes on the gains, you can use the gains to buy the next deal.

So all the compounding gains we saw with value add and leverage stay with you instead of going towards taxes.

Here is the kicker: If you cash out refi that money, then that isn't taxable either because it is considered debt.

Then comes depreciation. The building, in theory, depreciates as it ages and sustains wear and tear over time. However, in practice, it doesn't typically lose value, rendering this depreciation as more of a paper expense.

And if that was not enough, cost segregation lets you grab more of that depreciation expense earlier on new deals. This also means you can write off those losses against taxable rental income from the other properties.

There you have it. I hope it helps you think strategically. 🙂 


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