subject: Real Estate Can Help You Become a Rich [print this page] Use a Limited Liability Company to Hold Your Real Estate and Insulate Yourself from Liability. This isn't really a way that real estate can help you become a millionaire, but it is a way to protect your assets and keep you a millionaire (or however wealthy you may be). Real estate ownership does come with some exposure to liabilities. However, you can protect yourself by holding the real estate in a limited liability company (LLC). If you own multiple properties, it is often wise to hold each property in a separate LLC. Thus, if someone is every injured on your property and the injured party attempts to sue, the only property that will be at risk is that one piece of property but the injured party will not be able to make a claim against your other pieces or property or your personal assets such as your own home or your bank accounts.
Note: Again, there are some formalities involved with properly forming and maintaining an LLC. If you are unfamiliar with how to properly form and manage an LLC, consult your legal advisor.
Putting it all together:
The following numbers are from a parcel of property that was recently on the market. The property is currently for sale for $120,000. It has 3 rental units. Together the 3 units provide a monthly rental income of $1,850 or $22,200 annually. The annual property taxes are $920. Utilities are about $5,280 per year.
Assume that I take out a $100,000, 15 year fixed rate mortgage with a 7% interest rate. I pay the other $20,000 in a cash down-payment. The monthly mortgage payments would be $899 or $10,788 over the course of a year.
Annual Rental Income: $22,200
Less Mortgage Payments: ($10,788)
Less Utilities: ($ 5,280)
Less Property Taxes: ($ 920)
Positive Cash Flow: $ 5,212
Positive Cash Flow: $ 5,212
Equity after 1 year: $ 3,909
Total 1st year income: $ 9,121
This is a 46% return on the initial $20,000 down-payment! Now, I did not factor in any expenses for improvements and maintenance to the property, but I figure it is a reasonably fair assumption that these will be offset by depreciation deductions and market appreciation.
The above numbers just reflect the 1st year. The longer the property is held, the faster than equity will build and after 15 years, the mortgage will be fully paid off creating an even higher positive cash flow.
Assume I hold the property for the 15 years and the mortgage is fully paid off. In the interim years I have been creating positive cash flow which I can invest in other avenues such as the stock market or other real estate. After the 15 years, I have built up $120,000 in equity in the home (not accounting for any appreciation). I could then use this as a down-payment on a new real estate investment. If I figure on making a 20% downpayment, I would then be able to purchase a $600,000 mortgage and begin the equity building process all over again.
Now, like I said above, the real estate market can vary in different regions but if you do your homework and properly follow the rules, real estate investing can put you well on your way to becoming a millionaire. In
fact, many of the clients that my law firm works with on a regular basis have built their wealth through real estate investing.
