While not everyone wants or needs to be a millionaire, I certainly plan on becoming one. And I'm on track to do so sooner rather than later, largely because of real estate.
But there’s a wide gap between starting out as a real estate investor and becoming a millionaire. So what do you need to know and do to bridge that gap?
Start with the following four keys to how to become a millionaire in real estate.
Key 1: Master the Fundamentals Before Scaling
Everyone wants to run before they can crawl. It’s simply human nature: our reach usually exceeds our grasp.
But when you work with assets worth hundreds of thousands of dollars, mistakes cost you enormous sums of money. Which means that in the beginning, you should start low and go slow.
Before doing your first deal, learn everything you can about that real estate investing strategy. If you want to become a landlord, soak up every morsel of knowledge you can about how to buy rental properties. Learn how to forecast cash flow accurately (psst: it’s not “rent minus mortgage”). Learn how to determine fair market value for rentals.
Most real estate investors make expensive mistakes when they first start out, and later they’re quick to tell you what they wish they’d known earlier. Learn as many lessons as you can the easy way: through other people’s expensive mistakes, not your own.
That could mean finding an experienced partner. Or it could mean finding a mentor in the industry.
If you want to know how to become a millionaire real estate investor, find someone who already is one, and work with them on your first four or five deals.
Key 2: Invest Consistently
Novice investors who jump out of the gate and make those expensive mistakes are more likely to quit real estate instead of chalking up the mistake as a lesson and keep planning to become a real estate millionaire.
You probably won’t earn high returns on your first few deals. You may even lose money. Take your licks, learn from them, and keep investing better with each deal. You’ll never learn how to become a millionaire real estate investor if you flip one house and then never invest again.
Instead, turn around and keep investing. Flip the next house, and the next, applying both your profits and your rapidly increasing knowledge and network into ever more lucrative deals.
Buy a second rental property, then a third, fourth, and fifth. As your cash flow grows, so will your ability to buy more deals, and suddenly you find yourself building momentum as you snowball your portfolio.
Your strategy for how to become a millionaire in real estate must include consistent investing. You’re running a marathon, not a sprint, so let go of any get-rich-quick notions you’re still secretly harboring.
Key 3: Leverage Other People’s Money—Carefully
The ability to leverage other people’s money (OPM) to build your own portfolio of income-producing assets is one of the greatest advantages in real estate. Use it to your advantage as you plan how to become a millionaire real estate investor.
However, remember that leverage amplifies your returns—positive or negative—on a property. By putting down 20% and borrowing the other 80% to buy a rental property, you can turn a 7% cash flow yield into a 12% cash-on-cash return. Or you can turn a breakeven property into a money pit with negative cash flow.
Crawl, then walk, then run. Start with smaller deals with more of your own cash and less borrowing, to reduce your risk as you learn the ropes. Later, as you prove you can consistently earn strong returns, you can start investing in real estate with little of your own money. But don’t start there.
New investors complain that it’s in the beginning when they need leverage the most. That they don’t have enough cash to get started without leveraging properties to the hilt. My response: then you don’t have enough cash to get started yet. Keep saving money, perhaps by house hacking in the beginning.
Key 4: Diversify
Yes, you should invest consistently, and master one type of real estate investment before you bounce around to others. But you also shouldn’t put every penny into one type of investment, in one housing market. Eggs and baskets and all that.
Start your diversification strategy by investing money in stocks as well as real estate. Open an account with a free robo-advisor to automate your investments in a diversified portfolio. I personally use Charles Schwab’s robo-advisor, but SoFi Invest offers a good free one as well. Stocks complement real estate investments well, balancing each others’ strengths and weaknesses.
You also want to diversify your real estate investments. You can diversify geographically, investing in multiple markets around the country or even the world. But you can also diversify by investing in different types of real estate. That could mean raw land instead of single-family rentals. Or it could mean apartment buildings or commercial buildings, as you scale.
Consider investing in REITs, particularly private REITs such as Fundrise, as an easy way to diversify. Combine diverse income streams to map how to become a millionaire in real estate.
Much as you want to work out how to become a millionaire real estate investor within the next year, it won’t happen overnight. Let time do some of the heavy lifting for you.
With time, most real estate investments appreciate in value. Rents also rise, improving your cash flow and ROI over time.
Focus more on the fundamentals and gradually building your real estate portfolio rather than racing to become a millionaire. The irony is that by setting aside the frantic mindset, you’ll build wealth and passive income faster, and will be able to retire with real estate that much sooner.