Real Estate Investing for Beginners | Turn 20K into 6M in 20 years

This is a strategy I began using as a new landlord a long time ago. It makes sense and it works for me, perhaps it can help others out there. Before I explain the steps, there are some basic assumptions that you need to ensure in order for this process to work for you.

Assumptions:
1. You should always be able to find a loan at 90% of the property value (90% LTV) with 7% annual interest.
2. Positive cash flow with no negative tax effect – if you made the right investments, you should always be making a small profit (rent after expenses) while reporting a small loss (after depreciation)
3. Property appreciates 5% a year

Step One:
Buy Property A for $150k with 10% down.

If you do just step one, in twenty years the property will have appreciated to $397995 and your loan balance would be $77,354, and your $15,000 investment would become $320,641 in equity, a 17.8% rate of return over 20 years. But don’t stop there. Refinance in 5 years, buy another investment property, and repeat process as desired.

Step Two, Five Years After Buying Property A:
Property A
Appreciated Value $191,442
Loan Available (90%) $172,298
Loan Balance $127,078
Cash Out Refinance $45,220

Buy Property B for $450k with 10% down from cash-out refinance on Property A.

Step Three, Ten Years After Buying Property A:
Property A Property B
Appreciated Value $244,334 $574,326
Loan Available (90%) $219,901 $516,894
Loan Balance $162,187 $381,233
Cash Out Refinance $57,714 $135,661

Buy Property C for $1.9M with 10% down from cash-out refinance on Property A & B.

Step Three, Fifteen Years After Buying Property A:
Property A Property B Property C
Appreciated Value $311,839 $733,003 $2,424,935
Loan Available (90%) $280,655 $659,702 $2,182,441
Loan Balance $206,996 $486,560 $1,609,650
Cash Out Refinance $73,659 $173,142 $572,791
Buy Property D for $8.19M with 10% down from cash-out refinance on Properties A, B, & C.

Step Four, Twenty Years After Buying Property A:
Property A Property B Property C Property D
Appreciated Value $397,995 $935,518 $3,094,900 $10,452,746
Loan Available (90%) $358,195 $841,966 $2,785,410 $9,407,471
Loan Balance $264,185 $620,988 $2,054,367 $6,938,439
Cash Out Refinance $94,010 $221,008 $731,043 $2,469,032

After 20 years, your $15k investment has turned into $3,515,093 of equity, a 31.4% rate of return.

If you started with $20k, you could end up with $6,738,187 of equity, a 33.8% rate of return…imagine the possibilities when you have more money to invest…

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This entry was posted on Monday, December 1st, 2008 at 1:00 am and is filed under Other Tips. You can follow any responses to this entry through the RSS 2.0 feed.