Why I Own Over $4,000,000 In Real Estate

What's up you guys? It's Graham here. So, I think it's no surprise that throughout the last 11 years I've made my entire focus centered around real estate. I would save up as much money as I possibly could. I would not buy Starbucks with it, and then once I had enough money, I would buy a property to then rent out. That continued to the point where over the last seven years, I've accumulated just over four million dollars worth of real estate, mostly centered throughout the Los Angeles region here in California.

Even though it's been a bit of an arduous journey to go and find these properties and remodel them, and then rent them out, and then get them up and running, it's been nothing short of amazing. By far, it's been my favorite investment of all time. But it doesn't stop there. Flash-forward to today, and I've literally been saving away every single cent I made from real estate sales and also from those annoying five-second ads that you see on my YouTube videos.

I'm gonna be throwing all of that money back into buying another property so I could document the entire experience firsthand and show you exactly what goes on behind the scenes of buying a rental property and building up a real estate portfolio. So, maybe almost consider this like video number one in that series where I'm gonna be going over exactly why I'm throwing everything I have into real estate, exactly what I look for, and what makes real estate such a good investment in the first place.

As always, if you guys enjoy videos like this, make sure to do me just a small favor and just make the like button turn blue. But anyway, with that said, let's get into the video.

Now, one of the main reasons I've chosen to invest in real estate is a very simple one, but also something that not enough people fully appreciate. That would be leverage. This is the practice in which you borrow cheap money that then goes and makes you more money somewhere else. That means that you're able to profit the difference between what you pay out and what you receive in return.

Let’s just say in the first scenario, you go and buy a hundred thousand dollar home outright in cash that makes you one thousand dollars a month in rental income. That means your one hundred thousand dollars makes you twelve thousand dollars annually, or a twelve percent return on your money. No, that's not bad. But then imagine in situation number two where if instead, you use that $100,000 as a down payment to buy a $400,000 property that makes you four thousand dollars a month.

From that, you end up getting a three hundred thousand dollar loan and a five percent interest rate, meaning you spend fifteen thousand dollars a year in interest. That means you have a thousand dollars a year coming in, you have $15,000 a year going out as interest, leaving you with $33,000 a year in profit. That means that leveraging that $100,000 took you from a 12 percent return when you buy a property outright in cash to a 33 percent return when you just leverage your money, all for the exact same amount of money and all for the exact same amount of work.

This is why real estate is really such a game of smart long-term borrowing and using debt as a tool rather than as a weapon. I've used this analogy before, but it's just so true: debt is a lot like fire. It could be something that cooks your food and keeps you warm, or it could be something that burns you alive if you don't know how to properly use it.

So leveraging real estate like this is really something that you need to have work for you, and really understand and respect that and not take advantage of it. Also, do not make stupid decisions either. But when used properly, leverage is really one of the main reasons why I invest in real estate, because you can control a very large amount of assets with only a small amount of your own money out of pocket.

Now secondly, another hugely important reason I invest in real estate as well as pretty much every single real estate investor ever is cash flow. This means you'll be getting a consistent amount of money returning to your pocket each and every month as your tenant pays you rent. This is actually the reason why I started investing in real estate to begin with. I was working as a real estate agent, and the inconsistencies in that income were really starting to wear on me.

Like, some months I would end up making a lot of money, and then other months I would make absolutely nothing for months on end while I was working 10 to 12 hours a day. That sort of lifestyle didn't really sit well with me, so I chose to invest all of my money that I had saved up in real estate, knowing that at the very least, I would have a base level of rental income coming in every single month that could hold me over until I sold a house.

The term most real estate investors use when it comes to calculating how much money you're making is known as your cash on cash return. This just means how much money are you making from the amount of money that you put in? Like, if you invest a hundred thousand dollars, and that brings you back $20,000 in profit, then that just becomes a 20 percent cash on cash return.

Then that really becomes the baseline from which you could begin anticipating how much of return a certain investment is going to be making you. For me, I've really focused on trying to increase my cash flow each and every year, even if it means that the next year I make just a little bit more than the year before. Like, I'll go and make strategic upgrades so I could justify maybe a higher rental price, or I will buy a property in a strong rental market, or I will buy more durable materials knowing that they won't need to be repaired as often.

And really, by doing this and building it up over time, I've been able to generate about five thousand dollars a month now in rental income. That's enough to pay for all of my day-to-day expenses plus some. The best part about the rental income is that it's extremely consistent, almost like clockwork. For me, I don't really worry about prices fluctuating up and down like I would with stocks.

Even in the event I have a vacancy, for the most part, my income might drop a little bit for a month or two, but overall from my experience over the last seven years, it's been incredibly consistent. And that to me is really the end goal when it comes to real estate investing.

But third, let's talk about another huge benefit of investing in real estate and also a topic that I dread talking about. It just gives me the shivers, and that would be taxes. Now, I'm sure we all know taxes could put a major dent in how much you actually take home from a paycheck or from your profit. But thankfully, real estate has some amazing tax benefits and advantages. That means that oftentimes you're not gonna have to owe any taxes that you make in real estate at all.

And here's why. First of all, pretty much everything in real estate is a tax write-off against your rental income. Like, the mortgage interest that you pay is counted as an expense and therefore it's a tax write-off, or the property taxes that you pay is a tax write-off, and the insurance that you pay on that property is a tax write-off. For any repairs that you have to make throughout owning a property, it's a tax write-off.

Like, it even seems as though you could look at the property the right way, and it just becomes a tax write-off. But seriously though, any expense that you incur to generate a profit is just reduced by your total taxable income, and therefore you end up owing the IRS just a little bit less money.

Wait, so there's more! In addition to that, you also have something that's called depreciation. This is a tax law strategy where you could depreciate the value of the property over twenty-seven and a half years to offset your rental income. Because according to the IRS, every single year your property is deteriorating and therefore losing value, and you should be compensated for that—wink wink.

Now, here's an example of how that works. Let's just say of a property that's worth two hundred and five thousand dollars; that means that each and every year for the next twenty-seven and a half years, you could depreciate that property by ten thousand dollars. That means that the first ten thousand dollars you make in profit in net rental income, after all of your expenses, is completely tax-free.

In addition to that, you can also itemize some of the upgrades that you do to depreciate it over an even shorter period of time, therefore making potentially a lot more income from that also completely tax-free. This is how I'm able to make about five thousand dollars in net rental income without really having to worry about paying taxes on that, because I could depreciate the value of the property and show on paper that these properties are actually running at a loss.

This is something you can't really do with many other assets out there, and there's a major reason why so many people choose to invest in real estate knowing that the profit that they get in return isn't going to be taken away from the IRS.

Now, speaking of depreciation, let's flip that around and talk about another reason why so many people invest in real estate, including myself, and that would be appreciation. So here's what this is and why I like this so much: see, over the long term, your property should be going up in value as demand increases and also as inflation just makes everything else more expensive, including your property.

That means that one day your property is going to be worth way more than it is today. And then once you combine appreciation with leverage, you can start to see some pretty significant returns. For instance, here's an example: let's say you buy a property for $100,000, you put $20,000 down, and then over the next year, the property goes up in value ten percent and now it's worth a hundred and ten thousand dollars.

Now, if you went and put a hundred thousand dollars down and bought the home in cash, you would have just made a ten percent return on your money, which is not bad. But if you financed the property and got a mortgage with the $20,000 down payment, a ten percent increase in price translates to a fifty percent return on your down payment for pretty much doing like absolutely nothing.

That's why I really like investing not only for cash flow but also with the intention of having the property go up in value. I try my best to buy in areas that I feel are up and coming with a strong and diverse job market where I feel like prices still have room to expand.

Now, obviously, I'm talking about Los Angeles because I grew up and I live here, but there are so many other big cities across the United States where you can make very similar investments as well. And also, not to mention, in most areas, homes just will generally appreciate in value each and every year.

Of course, some areas are gonna be going up in value more than others, but the general rule of thumb here is that a home's value is going to keep pace with inflation, which is usually somewhere between two and three percent annually. Then, depending on how desirable that area becomes, you might see an additional few percent appreciation each and every year.

In the long run, this really means that over 30 years on average, you might expect to see anywhere from three to six percent appreciation each and every year. Like I said, some areas may be more than others; some might be less desirable, some might be way more desirable. But this would be the average long term, depending on the area that you're investing in.

Honestly, in the short term, who knows what the real estate market is going to be doing? But all I really care about is the long term: what is it going to be worth 20 to 30 to 40 years from now, not what it's going to be worth three or four years from now.

Speaking of all of this property value and profit talk and then not paying taxes talk, that brings me to one of my favorite points in real estate that I love more than just about anything, and that would be the almighty cash out refinance. Now this one is a little bit difficult to explain, but I'll do my best to simplify it as much as I can. Let's just say you bought a home worth two hundred and fifty thousand dollars many years ago, and now it's worth $600,000.

That means that you have three hundred and fifty thousand dollars available to you in profit, but the money is tied up in the house, just sitting there, not really doing anything. Well, the thing is, if you want to get access to that money, most people just think, "Well, you would have to go and sell that property."

And then once you sell it, whatever money you have left over is yours to freely spend and use. But the downside with that is that when you sell, you have to pay taxes on that profit, which could leave you with a lot less money than you would originally anticipate. So an alternative to that option of selling is to borrow against the money that you already have sitting in the home, which is known as the cash out refinance.

So in this case, since you have three hundred and fifty thousand dollars with a profit that's tied up in a property, you can go to a bank who will give you three hundred and fifty thousand dollars as a loan that you will repay in the form of the new mortgage. And now you have the money accessible to you to use, and you still get to keep the property.

It's a lot like saying I have a hundred dollars worth of profit that I want to use, but it's locked up and they don't want to get. Otherwise, I will have to pay taxes on it, so instead, I will borrow $100 from a bank who then holds on to my hundred dollars in the event I don't pay them. Now I have a hundred dollars to spend, and I'm never taxed on that money.

Then once you get that new mortgage, the same rules apply as above: the interest that you pay on that mortgage is a tax write-off, and you also get to continue leveraging your money to make even more money. Real estate's right there for the win.

This video really only scratches the surface of how people are making money doing this. Other advantages include just buying a property below what it's worth or fixing it up to raise its value and therefore raise the rents, not to mention the almighty 1031 exchange, which allows you to indefinitely defer taxes every time you sell real estate to go and buy something else.

But I will go over all of those in subsequent videos. If there's interest for me to document my progress and my experiences trying to find the next deal, just let me know. I've really started looking about two weeks ago, and now I'm just like super really motivated to try to find the right place.

Yeah, lately, the grind has been real. There's pretty much nothing out there that's a good enough deal for me to want to get, and so right now, it's really just a matter of patience and looking every single day to try to find one single place that could work.

So if you guys want more of like a vlog-style video like that, just let me know. But anyway, it's really because of everything that I've mentioned here which is why I put so much emphasis and effort into real estate investing over the last eight years. Pretty much everything I make goes into buying real estate, which makes me more money to then buy more real estate, which makes more money to buy more real estate until eventually, I get enough so I can get you guys to finally make the like button turn blue if you haven't done that already.

So, with that said, you guys, thank you so much for watching. I really appreciate it. If you guys enjoy videos like this, as always, make sure to subscribe, hit the notification bell, and feel free to add me on Instagram. I post there pretty much daily, so if you want to be a part of it, there, feel free to add me there.

Also, feel free to add me on my second channel. It is called The Graham Stephan Show. I post there pretty much every day. I don't post here, so if you want to see me now every day, feel free to add me there. Thank you again for watching, and until next time!