Through Real Estate, I Quadrupled My Net Worth in 5 Years

In the Money Mic series, LearnVest hands over the podium to people with controversial views about money. These are their views, not ours — and we recognize their strategies may not work for everyone — but we welcome your responses. Today, one man explains how he built a savvy real estate investment strategy — one property at a time. Hi, I’m Tim. I’m 34 years old — and an aspiring member of the Kiss My You-Know-What Club.

An old co-worker introduced me to this “secret society” years ago, declaring that he could do whatever he wanted in life — even retire that very day — because he’d achieved financial freedom. That conversation stuck with me, and I’ve made it my mission to achieve the same status. How am I getting there? Through careful savings, a diligent focus on income growth and shrewd real estate investments.

The Start of a Beautiful Relationship With Real Estate

I was attending the University of Texas at Austin when I executed my first deal. I’d started working at an e-commerce site around Christmastime during my freshman year, and was fortunate to still be working there when the company went public in the spring of 1999. I’d had my eye on some nearby property — land that was being developed into large custom houses. It was right on Lake Travis, and I relished the idea of getting out of the city to enjoy it.

A combination of intuition and market research led me to believe the land was undervalued — and the IPO was just what I needed to make the purchase. So I bought a couple hundred shares of the stock, and waited until my money increased 20 percent. Fortunately, it didn’t take long — in just a few weeks, I sold half for about $3,000. I combined that with some of my earnings, and put a 10 percent down payment on the land, which cost $52,500.

Stepping onto a piece of property and being able to say, “This is mine!” was so exciting. The right, emotional side of my brain couldn’t wait to relax, listening to the lake lap against the shore. And the left, analytical side of my brain saw some serious potential for wealth creation.

A Home of My Own

Fast-forward a few years: I’d graduated, taken a sales job with a Fortune 100 company — and wanted to buy a home of my own. But I couldn’t swing the $400 mortgage on the land and a new house. So I decided to sell the property, netting about $12,000, and used the cash for a down payment on my first house in Austin. That was just the beginning of my adventures in real estate. Two years later my job moved me to Des Moines — followed by three other cities in four years. With every move, my game got a little stronger.

I’d take advantage of attractive relocation packages — often $30,000-$50,000 to cover moving fees and closing costs — to ladder up, selling the house I was living in and going bigger each time.

I also cashed in on another perk: If your house sold within 60 days, you’d receive a bonus of 2 percent of your home’s value. Otherwise, the company had to buy the house from you after the 60-day mark, so it was in their interest to provide this incentive. I was able to sell my houses in time, so for each move I transferred my previous equity, profit from the sale, relocation money, and the bonus into the next place.

As a result, I went from having about $30,000 in equity in my first house to $80,000 in another home just four years later — without contributing any money of my own. I had a great run, but after several years I realized my heart was in Austin and I was tired of moving.

So I quit my job, moved back and found a sales consulting position with a flexible, work-from-home arrangement. Not long after, I got engaged to my wife Maria, who works in sales at a large consumer goods company. Back in Austin, where it all started, I doubled down on my passion for real estate.

Building a Future — One Property at a Time

As I was adjusting to my new life in Texas, I couldn’t help but think about my old colleague, and how liberating he said it felt to have financial independence. While I wasn’t sure if I wanted to retire early — and I’m still not — the thought of having a choice was motivation enough.

Even though I made good money, lived below my means and maxed out my retirement accounts, I doubted it was enough to propel me to financial freedom. Since I’d had a good experience with real estate — even if it was just buying and selling my own houses — I came to the conclusion that was my ticket. The next logical step, I determined, would be to reenter the market — as a landlord.

And Maria and I did just that in 2007, right after we got married. We bought a new home together, and then rented Maria’s. It was our first foray into investment properties — and we haven’t looked back. Since then, we’ve bought one rental property a year — a process we initially funded with our savings and tenants’ rent. In 2009 it became even more affordable when I got my real estate license, which allowed me to start collecting 3 percent commission instead of paying it.

Leasing Location, Leasing Location, Leasing Location

Austin is a great leasing locale, full of young renters. Fortunately, that led to a fairly steady market even when the rest of the country was still suffering from the major downturn in 2010 and 2011.

What’s more, while the financing market got tighter, the pool of renters grew bigger. And because rents were increasing significantly faster than home sale prices, I had a steady stream of clients interested in my other venture and income stream — a property management company.

I’d learned a lot managing our rentals — including having to evict a tenant — and realized I could help others be successful. Today — four years after I launched the company — I, with two employees, manage 80 properties for other investors. I help them find suitable properties, secure tenants, collect rents and manage the homes.

$11,000 a Month From Tenants

Overall, I’m thrilled with the success we’ve found — and the strides it’s allowed Maria and me to make toward our ultimate goal of financial freedom. Thanks to Maria’s income and healthy profits from the management company, I was able to quit my sales job in 2011.

We’re now bringing in $11,000 from tenants each month, with $6,000 going straight toward paying down our mortgage principals, and therefore increasing our net worth. The rest of it covers our property taxes, insurance and maintenance fees — and there’s still some free cash flow leftover.

We’re aggressively paying down our mortgages as quickly as possible, so I negotiated 15-year terms with low interest rates. We’re pacing to own five houses free and clear by the time I’m 47, and one more each year thereafter. That’s when our net worth will shoot through the roof: We’ll own all our houses outright and can pocket a huge chunk of the proceeds.

As a result of this incredible progress, Maria and I have been able to quadrupleour net worth in the last five years — and we see no signs of slowing down. Even if we never saved another dime or bought another house, the infrastructure we’ve created would still increase our net worth by $72,000 a year.

The Making of a Serious Investment Strategy

Even though real estate is my net-worth-boosting tool of choice, I realize it’s not for everyone. But I have found some key parallels between excelling in real estate and other types of investments.

For example, before I pull the trigger on a new purchase, I always envision the ideal exit strategy and worst-case scenario. With my first land investment, I wanted to flip it and make money. But if that didn’t work out, I could have kept my used car, continued to make payments and built a house on it down the line. I knew that, financially, I’d survive even if the “worst” happened — an assurance everyone should have before putting money on the line, whether it’s buying stock or supporting a friend’s new company.

I’m also diligent about calculating my ROI on each property by assessing the gross rent multiplier, or the ratio between how much rent a house can generate annually versus the purchase price. My goal is a gross rent multiplier of 12 — meaning that’s the maximum number of years it should take to pay off a house based solely on how much I receive in rent. It’s why you’d never want to rent out a $300,000 house for just $1,500 a month-it’d take too long to recoup your money.

Although this calculation is specific to real estate, it’s a principle anyone can use before making a large financial commitment. Take enrolling in grad school: It’s important to ensure you don’t spend more in tuition than you can earn back through salary bumps in a reasonable time frame.

Lastly, because I believe so strongly in my strategy, I’ve made sure to learn as much as I could about the industry — just like anyone would research an investment before diving in.

Inspirational In-Laws

Honestly, I think I’ve been so motivated to master the real estate market because it’s my version of the American dream. After all, I’ve had some amazing role models who’ve reinforced this idea.

My in-laws immigrated to the U.S. from Mexico when they were teenagers. They started as migrant farm laborers, but as they learned English and eventually became citizens, their employment opportunities opened up. They worked tirelessly — my mother-in-law in food service and then retail, and my father-in-law primarily in construction. Even though they didn’t have much, they expertly leveraged real estate investments to create a significant net worth.

They started simply: They lived in a rented trailer, but saved up enough to purchase it — and eventually the land it sat on too. Then they rented out space on that land to accommodate three other trailers. This was years ago, of course, and they lived in Amarillo, which has a very low cost of living — so they only paid a few thousand dollars for the land. But they did all the work themselves to maintain it, and charged enough rent to retire their debt in just a couple years.

Once they owned the land outright, they purchased a small house, and aggressively paid it off. They followed that cycle for years: Move, work hard to pay off a property in five to eight years, rent it out, and start over. The end result? They were able to send three kids to college and amass a large-enough portfolio to fund their retirement.

That success story is a huge inspiration for Maria and me to keep moving forward — and proof of the power of real estate. If Maria’s parents could achieve financial freedom with such few resources, how much more can we accomplish with ours? I can’t wait to find out.

[source : dailyfinance.com]