Hey it's brandon from biggerpockets, and today i want to show you on this whiteboard a real, simple explanation of how a person can go from really almost nothing to becoming a millionaire by owning rental properties and hey. If you find this video helpful, don't forget to click that little thumbs up button below the video, it really helps make sure more people are reached with this message. So with that, let's first get a little bit of clarification on how this works. This real estate thing works first of all, we're talking about buying rental properties, which means you buy a house or maybe a duplex or an apartment, building whatever and you rent it out now before i walk you through the math behind becoming a millionaire through real estate.
I actually want to get us all on the same page or the same board as to the fundamentals about owning rentals, on why they're so powerful, and to do that. We'Re going to talk about something called the four wealth generators, the four wealth wealth generators did. I spell that right sure all right, so these are the four things that really make owning rental properties so awesome and when they're combined together can make you a millionaire. Now i talk about these a lot more in depth. In my book, the book on rental property investing which you can get on amazon or barnes, noble or uh, wherever biggerpockets.com says rental book, but hey
Let me give you them right now, the quick and dirty on the four wealth generators number one is going to be cash flow, so the first thing cash flow. That'S the extra money every month that a property produces in profit. It'S income minus expenses. The key to that, though, is understanding expenses, because they're kind of tricky right make sure you get all the expenses when you're calculating, but basically this is just the money you're left with in your pocket.
At the end of every month now number two appreciation: this is basically the simple truth that real estate tends to climb over time in value now sure things like 2008 do happen, and prices do drop, sometimes a lot, but over time prices tend to climb as long As you can hold on to a property long enough, you should always see appreciation and that's why cash flow, which we just talked about a second ago, is so vital right, because, as long as i'm making cash flow, i can hold on to it as long as I need to waiting for the property to climb in value now number three: the loan pay down now. Normally, when you buy a piece of real estate, you get a loan from a bank which you then pay every month, but the cool thing is over time. The loan then gets paid down, which means you might start owing what's called 200 grand, but eventually you'll own, nothing right.
So the loan starts here and over time tends to drop on what you owe it and number four. The fourth wealth generator tax benefits. Okay, so for the purpose of this video, we're not going to talk a lot about tax benefits, but in real life man. The tax benefits are huge, like if you made a hundred grand from real estate and your friend made a hundred grand from a job or maybe a business they own. Who do you think, would end up keeping more money. You would, with real estate way more money than your friend alright. So let me show you how these four walt dinners can make you a millionaire when combined together, ? Okay, let's just say you bought a house as a rental property. Maybe you put down 20, or maybe you found a more creative way to finance it and you're able to do it with no money down which is by the way, is entirely possible.
In fact, we've got a ton of content on bigger pockets. All about that heck. I even wrote a book on it, but anyway, let's say you bought that house. Here'S our cute little house and even three dimensional house, because i'm fancy you bought the house for a hundred grand and you put down twenty percent, so you bought it for the hundred Thousand dollar value. You put down twenty percent, which is twenty thousand 000 down. That'S a horrible dollar sign, meaning you're left with an 80 000 loan or mortgage, as we call it now, because you bought a property that has cash flow, the first wealth generator, let's say you're, also now, at the end of the day, you're making two hundred dollars Every month in cash flow, which is twenty four hundred dollars per year, we'll call it twenty four hundred dollars per year in cash flow you're a millionaire just kidding no, but this is where it starts right. All right,
So after one year, you've now made 2400 good for you right, but there's more to that right, because during that time your loan balance dropped from only owing like 80 000. That'S actually dropped down, because over time the loan gets paid down right. So you started at 80, but in fact, after that time you only owe about 78.5, so you've made about fifteen hundred dollars just by on loan paydown, but at the same time prices tend to go up on average so where the property was worth a hundred thousand Dollars you now after one year, we'll say on average three percent appreciation it's now worth a hundred and three thousand dollars. So let's add all that together right. So you have the you've had three thousand dollars in value here: you've added fifteen hundred dollars there and twenty four hundred dollars in cash flow.
So, really, during the first year, you've now three four five sixty nine hundred dollars, you've actually added sixty nine hundred dollars to your net worth now. Of course, you're, not a millionaire yet, but over time. The cool thing is that this process speeds up. You start paying off more and more of the loan faster and faster, and the value of that property goes up as well. In fact, if you look here, the property value getting paid down the other one going up. If we were to erase this and we try to draw it on one graph, you can see that over time, the value of the property we'll call this the value of the property was that we'll call it a hundred thousand dollars. It'S climbing in value three percent per year, but the loan, which was that eighty thousand is actually going down each year as well. This spread right here is known as equity, and this increases over time.
The longer you hold it, in fact, here by year, 10, It'S actually worth about a hundred and thirty thousand dollars, but you only owe about sixty thousand dollars on the property, which means just alone there. You'Ve got about 70 000 in equity, now add on the fact that that's over 10 years right over 10 years, you've also made 2400 a month in cash flow every single year, 2500 a year in cash flow, which is another 24 thousand dollars.
So by this point, you've gotten ninety four thousand dollars in wealth built from that one property. Now i know a lot of you are thinking 10 years of work and you only made a hundred grand that's gon na. Take me a hundred years to get to a million dollars. Well, here's the cool thing. This is just one simple, cheap little property. I mean once you figure out how to do one deal, you can do another and another and another and furthermore, you don't have to stay small with a hundred thousand dollar house. In fact, what if you were to buy a five hundred thousand dollar small apartment, complex or even a five hundred thousand dollar house, the same principles apply over time. The value tends to go up and the loan tends to get paid down, so you're, paying off a little bit more every month and add a little more in value every single month and you're getting wealthier, and that is how you become a millionaire through rental properties. You buy cash flowing rentals that increase in value over time, while also paying down the loan a little bit a little bit at a time, you're becoming wealthier.
Now a couple concerns you might be having number one, How do i come up with all these down payments If i'm gon na buy a bunch of rental properties? Well, in the beginning, maybe you'll save up for the down payment. But honestly i built my entire portfolio using some other creative strategies, things like house hacking or burr investing or using partners or raising private money.
Maybe you'll fix and flip houses and use the profit from those flips to invest in rentals, there's a lot of ways to put together a deal, but the bottom line is: if you have a good deal, you're going to figure out a way to finance it now Number two: how do you know if you have a good deal? Well, you got to learn how to analyze them. You know: we've got calculators over on biggerpockets.com analysis that you can use. I also teach a free webinar every week on bigger pockets, where i walk people through how to do the numbers to sign up for next one at biggerpockets.com webinar. Now what about number three? How do you manage all these properties? Well, the short answer: is you don't? I mean you could, but for most of my properties i hire a property manager to look after them. Of course, you still got ta manage your manager, it's not a hundred percent hands-off, but they're the ones getting the late night phone calls. Not you all right. Question number: four: what if the market drops? Well, that's why i buy cash flow and rental properties.
If the market drops great i'll, just keep holding onto them and i'll buy more properties because now everything's on sale, you know what you can become a millionaire through real estate. I did it in under a decade yeah, it's not going to happen overnight, but it will happen if you're patient, you stick to sound principles and you continually educate yourself on how to become better and hey.