How Millionaires Make Money From Real Estate

by : Naomi Botha

Learn how to invest in real estate and use investment property to your advantage in creating wealth.

Intelligent use of real estate can enable ordinary people to become millionaires in about 10 years or less.

A lot of statisticians say that on average across the board, property has doubled on average every 7 to 10 years in the last 146 years in Australia, this has happened in many other countries also. This statistic depends on location, quality of property and the price you pay for it of course.

How you can use property to create wealth
For instance, Bill and Mary are earning $50,000 a year and they want to replace their income. I am going to suggest that just by buying two investment properties, they could achieve this. Let us look at how they can buy two investment properties for them to retire. $50,000 a year is approximately $35,000 per year after tax. So would you be committed to buying 2 properties in the next decade if you could retire from them?

In year 1 of the plan, we are going to buy one property. The properties I tend to buy are often around $300,000, which we will use for this strategy. The second year we do not buy any property and the third year we buy our second property. In ten years time, these properties could be worth $600,000. That is 10 years after you buy them. (Always make your plans conservative as it could take 10 years or longer.) I generally buy properties in capital cities because these properties will continue to grow.

If the property doubles in 10 years, this is $300,000 in extra money we have made over 10 years per property, i.e., $300,000 each, now worth $600,000. You have earned $300,000 from capital growth. Bill and Mary need $35,000 a year net to replace their current incomes. They are probably thinking if they buy the property, they have to work harder. If they buy and sell to make a profit, they generally have to pay capital gains tax. In this strategy, we are going to buy a good property and keep it ideally forever. It is worth $600,000. They need $35,000 net cash to replace their income. Where can they get that from?

What about a line of credit?
A line of credit allows us to draw equity/cash out of property by setting up a bank account from which to draw this down. They can draw out $35,000 in the first year, then do the same in year two and three.
In years 4, 5 and 6 they could take say $35,000 our of the second property. It is just sitting there so why not use it? If they do not use it, when they die, someone else gets it, so they might as well use the money they have made.

Six years after the first property is worth more than $600,000, being in a capital city, it may be worth $900,000 plus. That gives them another $300,000 sitting there available to use. They have not finished using the first $300,000 and now they have another $300,000 and the property keeps going up in value whether they like it or not. This means they have more than they need for retirement.