According to Forbes magazine, over 90% started their fortunes in real estate.

But the question is Do you know why 90% of millionaires invest in real estate?

Let's take a moment to think through what we think we know about real estate investing.

1. Tax savings
2. Rental income
3. Middle of the night calls
4. Collecting rent
5. Damages to property
6. Rehab flipping houses

For the average person thinking about real estate investing, the first thing that comes to mind is being a landlord of single family or up to 4 unit quadraplexes.

​In reality, this is only the tip of the iceberg in real estate investing.
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​If you have a stock advisor, and you bring up real estate, they will discuss real estate investment trusts (REITs) that you can invest in your stock portfolio. That's not really investing in real estate. It is buying stock in a real estate investment firm.

So, how do millionaires make their money in real estate? It's not always what you think.

There are a lot of different ways to make money in real estate, and the question is how do you want to make money in your real estate portfolio? There is a hard way and an easy way to take advantage of growing wealth in real estate.

HARD WAY

Let's first look at the hard way. This is how most people think they are investing in real estate.

In 2001, I took over the mortgage department at the bank I worked for. I helped a lot of people buy single family and small multifamily duplex and triplexes at the time. I thought these people were smart to buy real estate.

I witnessed so many of them buying property at full retail prices where the rent didn't cover the mortgage payments. They were excited to own the real estate. Since then, I've learned that this is not really investing smart, it is speculation.

The hard way to own real estate is to pay for it every month from your w-2 income and to self manage without pay. Over time, the property will eventually have positive cash flow and be valued higher, however this is a high risk, high stress position to be in.

You are the one the tenants call when there are problems. You get the call for the clogged toilet or the a/c that went out. You hear complaints about other tenants and neighbors. You get to do all the tax filings and paper work associated with leases. It can be a very hard and risky position to be in. It's not advisable.

If the mortgage company allows you to buy a piece of real estate with 25% down, a $100,000 investment buys you a $400,000 asset. Any repairs are in addition to the original 25% down.

​Figure a 5% appreciation in value based on market factors and sales comparisons. = $20,000 of equity in that year.

EASY WAY
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The easy way to invest in real estate is to find operators who structure large commercial assets like multifamily apartments, storage facilities, student housing or other commercial property.

These operators (aka sponsors) actually do all the leg work for you. They find the deals, sign on the debt so you don't have to, work with the SEC attorneys, work with the management team, and handle all the paperwork. This approach literally makes you a passive and silent partner in the deal.

You don't have to have all the knowledge to manage a 200 unit apartment complex. You'll never receive any calls for repairs. You don't have to stress about your taxes. You simply agree to the private placement memorandum and partnership structure of the LLC operating agreeement.

When you submit your investment in the deal, you've just become a silent partner in commercial real estate holdings.
Your active partners, the sponsorship team, ultimately become your asset manager. This type of real estate investing is not like a REIT in that you actually own a fractional share of the real estate.

In a REIT, you own stock in the company who owns the real estate. Imagine earning double digit returns year in and year own without needing to ever unclog a toilet or paint a vacant apartment. The best part is that silent partners receive all the benefits of owning the real estate.

In these deals, the lenders will typically require 25-35% down payment against the entire purchase price + repair costs.

That is significant. Your $100,000 can actually position you into a $40,000,000 asset through fractional reserve.

Your ownership percentage is based on the percent of the total down payment & costs associated with the property.

So for example, if the total equity needed in the deal is $12,000,000, your percentage of ownership = 0.83% of the entire deal.
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​Factor in a gain of 10% (example only) during the first year based on Forced Appreciation through management efficiencies = $4,000,000 gain in value or $49,800 in your stake based on a $100,000 investment.

During the first year, you received 8% cash flow or $8,000 paid in distributions & $49,800 in value gained through forced appreciation. Factor in your tax savings through cost segregation and bonus depreciation and you're talking about some real growth.

BENEFITS
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Here are a couple of reasons why 90% of millionaires invest in real estate. Look at these benefits...

The debt is paid off by the tenants - other people's money = wealth creation

The IRS allows depreciation expense against income to reduce taxable income (talk to your tax professional)

Potential for additional income streams

Passive investment means dollars work harder than you

Mail box money means you receive checks for your investment made in the past, not hours worked today

Leverage of other people's time (sponsorship team) to produce a income and equity = true wealth

Other people identify the best investment / partnership opportunities

Limited partnership requires very little to no time investment

Over time, investments can grow exponentially in hard assets rather than paper assets. Income and equity both grow over time with opportunity to multiply wealth.

Very few millionaires make their money in other avenues than real estate. The growth potential exceeds paper assets with the ability to leverage the bank's and the tenant's money to grow wealth.

Leverage is one of the most powerful tools in investing which also reduces risk.
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