Become a Millionaire Real Estate Mogul

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By Lisa Gibbs

Becoming a landlord has always been a well-worn path to millionaire status, with good reason: Not only does owning properties let you generate a second source of income, your tenants' checks will help you build equity in your investment.

The case for owning rental real estate is even more compelling now, thanks to depressed prices, super-low interest rates, and the fact that the shortage of rental housing is the most acute it's been in five years, according to CoreLogic.

With median prices on existing homes at around $182,600, you won't get rich by owning one home. Based on modest estimates for appreciation and reasonable expectations for profits, it's likely to take three or more properties to produce the cumulative equity and rental earnings that you need to get to the nominal sum of $1 million down the road. (Throughout this story, references to $1 million are to the nominal -- not inflation-adjusted -- figure.)

Part of a special report on how to reach $1 million, this story explains how investing in real estate can put you on the track to becoming a millionaire.

Key move: Expand your holdings to at least three properties

How to Get There

Maximize your market. Once you own a property or two in an area, adding a third nearby generally makes sense, says Chris Clothier, co-owner of Memphis Invest, which buys and manages rental homes for investors. "It's usually easier to manage," he says. You can also save on maintenance by using a single contractor.

If fielding late-night calls about water leaks doesn't grab you, grouping your properties will also let you find a single company to manage your properties (typically for about 8 percent to 10 percent of the rent plus commissions).

Of course, you'll want greater diversification if you're buying in a smaller town dominated by a single large employer.

8 PHOTOS
6 Places Where Rents Are Skyrocketing
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Become a Millionaire Real Estate Mogul

Change in rent: +10.2%
Change in sales price: +4.3%
Price drop from peak: -11%
Job growth, 1 year: +0.53%


Colorado Springs has as experienced only a modest increase in jobs in the past year. Yet rent in the region increased 10.2 percent in the 12 months ending April 31 -- the sixth-largest increase among the 100 metropolitan areas the agency examines. Home prices also increased over the same period by 4.3 percent. According to Realtor.com, the number of listings in the area fell more than 25 percent in the past year, perhaps partly explaining the price increase.


PHOTO: House of Hall, Flickr.com

Change in rent: +11.1%
Change in sales price: +1.7%
Price drop from peak: -6.6%
Job growth, 1 year: +1.49%


Of the 100 metro regions examined by Trulia, home prices in Indianapolis had the second-smallest decline during the recession, losing just 6.6 percent of total value. In the past year, job growth was roughly 1.5 percent, above average for the cities on our list. Compared to rents, asking home prices increased to a much lesser extent of just 1.7 percent, the 32nd-largest rise among the cities examined. According to Realtor.com, list prices as of April 31 were among the lowest in the U.S.


Photo: Intiaz Rahim, Flickr.com

Change in rent: +11.8%
Change in sales price: +6.9%
Price drop from peak: -35.5%
Job growth, 1 year: +2.53%


During the recession, home prices in the Warren-Troy-Farmington Hills area of Michigan fell 35.5 percent, among the biggest drops in the country. Recently, however, asking home prices in the region, which is part of suburban Detroit, have recovered rapidly, up 6.9 percent in the past year alone. Compared to homes, however, rent prices have truly skyrocketed in the past year. In the last quarter alone, rent went up 4.5 percent. In the past 12 months, rents are up 11.8 percent. The likely reason for this increase is the 2.5 percent growth in employment in the area, the 10th-highest jump in the U.S.


Photo: Sidesmirk, Flickr.com

Change in rent: +12.3%
Change in sales price: +16.1%
Price drop from peak: -45.5%
Job growth, 1 year: +2.34%


Among the real estate markets to have the largest increases in rent in the past year, no region was more severely affected by the recession. Home prices in the area fell 45.5 percent from peak, the 14th-biggest decline in the country. However, the situation has begun to turn around in the area. Home prices increased 16.1 percent in the past year, and rents rose an estimated 12.3 percent during that time. Job growth is strong in the area at 2.34 percent.


Photo: PilotGirl, Flickr.com

Change in rent: +13.2
Change in sales price: -0.5%
Price drop from peak: -22.1%
Job growth, 1 year: +2.92%


The increasing popularity of the San Francisco real estate market is extremely lopsided. List prices for homes actually fell 0.5 percent in the past 12 months. Meanwhile, rent prices increased 13.2 percent -- the second-largest increase in the country. The number of employed people in the city grew just shy of 3 percent in the past year, the seventh-highest rate in the country.


Photo: riacale, Flickr.com

Change in rent: +15.6%
Change in sales price: -4.7%
Price drop from peak: -18.2%
Job growth, 1 year: +0.69%


Job growth in the Edison-New Brunswick metro area has been modest. Nevertheless, rent in the region jumped a full 15.6 percent in 12 months, by far the largest increase in the country. In the past quarter alone, rent increased 4 percent. Meanwhile, home prices actually fell 4.7 percent, the 11th-largest decrease in the country.

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Think duplex or triplex. That extra unit probably won't cost you much more, yet the extra rent can be significant.

Three years ago, real estate agent Greg Markov bought a triplex in Phoenix for $70,000, or about $5,000 more than what he would have paid for a single-family home in the same neighborhood. With more units, Markov's maintenance costs are higher -- he budgets $2,000 a year, vs. $1,000 for a one-family home. Yet the three units throw off $1,500 a month in rent, not $900.

Also, Fannie Mae rules state that you can finance up to four properties -- which includes your primary residence -- with just 20 percent down. Homes five through 10 will require at least 25 percent down and a higher credit score (720 vs. 620). Fannie, however, counts a duplex, triplex, or fourplex as a single property, so you can finance more units at beneficial terms.

Finance creatively. Take what the market is giving you. Buying with cash, for instance, will get you the best prices. So if you have, say, $150,000 saved up, try purchasing house No. 1 with savings. Then within six months, take out a Fannie Mae-backed loan on 80 percent -- in that time frame Fannie will consider it a purchase loan, with better terms than a cash-out refinance. You can use that $120,000 to buy house No. 2.

Own your own company? The U.S. Small Business Administration offers 10 percent down low-cost real estate loans as long as the business occupies at least 51 percent of the space.

In 2010, Greg and Audrey Charlap of Hermosa Beach, Calif., obtained SBA financing for a $755,000 store/warehouse with three apartments upstairs. The rent checks cut the real estate tab for their business, baby-products retailer Pampered Tot, by 35 percent, Greg says.

Getting Into Gear

Where to look: Begin your search near large employment centers or universities, where strong rental demand will ensure profitability.

How to price it: Your operating income -- rents minus expenses, not including debt service -- should be at least 1.25 times your principal and interest, says mortgage broker Kathleen Kramer.

How to dress it up: Don't scrimp on amenities. A few upgrades, such as granite countertops, will make your rental stand out and reduce vacancies.

How to vet tenants: For $10 to $30, services such as LexisNexis and mysmartmove.com will run credit and criminal background checks.

See more at CNNMoney:
Home Values Rise for First Time in 5 Years
Wall Street's Hot Investment: Your Home
Millions of Older Americans at Risk of Foreclosure

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