Have you started investing in real estate and aren’t sure how to move up the property ladder or even what it’s all about? Then read on for important information on how you can build a real estate portfolio that can generate enough money to retire.
The property ladder, as many experts call it, is the path investors take as they move from single-family homes to duplexes to multi-family investments. It’s called the Property Ladder because each ‘rung’ of the ladder is smaller than the next. The goal is to create a portfolio that will one day generate enough passive income for you to pay your children’s college tuition and fund your retirement and lifestyle. If you’re diligent and patient, you can turn a $30,000 investment into $2 million or more over 30 years.
For most investors, their first purchase is usually a single-family home or SFR. This is a purely speculative investment and the hope is that it will increase in value. Once he does, he sells the property and uses the capital gain to purchase a 2-4 property, also known as a Duplex, Triplex, or Fourplex. These properties will generate more cash flow than an SFR and are typically the second rung on the property ladder.
The ultimate goal is to sell your 2-4 unit properties once they have appreciated in value and trade them for a multi-family property consisting of 5 units or more. This is called a 1031 Exchange and it allows the investor to defer paying taxes on the gain until sometime in the future.
The key to scaling property and growing your passive income stream is keeping your capital going. I encourage all my clients to sit down with their real estate professional at least once a year and review their real estate portfolio. Once your property has appreciated sufficiently, you should consider selling it and replacing it with a larger property that will generate more cash flow. Remember, be patient and consistent, and in time you will find that you have built a small real estate empire and successfully climbed your own property ladder!