How to build wealth using rental properties

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If you want to build wealth, there are dozens of playbooks to choose from. But no matter which one you check out, you’ll almost always find a chapter on real estate. And if you’re looking for a proven strategy that works over time – not a get-rich-quick scheme – investing in rental properties could be the perfect long-term solution.

When it comes to building wealth using rental properties, the easiest and most sustainable approach is to invest in one property per year. (If you start at age 30, this gives you roughly 30 to 35 doors by the time you reach retirement age.) And while they’re quite similar in many regards, there are two common ways to approach it. 

We’ll unofficially call them the “Snowball Method” and “One Property Per Year Strategy.”

The Snowball Method of Real Estate Investing

With this method, you purchase one rental property each year with the goal of maximizing monthly profitability. For example, you might purchase a house for $150,000 in year one. All of your expenses (including mortgage, taxes, insurance, maintenance, etc.) are $1,200. You use a rental estimate and discover that you can charge $1,700 per month in rent. This gives you a positive monthly cash flow of $500.

After a year of owning your first property, that $500 piles up to $6,000 in a savings account. You then use this money to help pay for the down payment on another property with similar specs. Now you have two rental properties, which together produce $12,000 per year in profits.

With the Snowball Method, you keep rolling every dollar of profit into the next deal. Eventually, you’ll reach a point where you’re generating enough in net profits each year to buy bigger deals with even more cash flow potential (like duplexes and triplexes). Eventually, after 10, 20, or 30 years, you may decide that you’re content with the size of your portfolio. At that point, you’ll have a healthy six-figure income to draw from with minimal work required.

The ‘One Property Per Year’ Strategy

The Snowball Method is very conservative. If you’re willing to take on slightly more risk and volatility, the One Property Per Year Strategy offers the potential for even greater returns. (It also requires more cash upfront – and usually targets inexpensive properties in less favorable areas of town.) Here’s how it works:

1. Purchase one property per year in cash.
2. Property value is $70,000, but you pay $60,000 (giving you $10,000 in immediate equity).
3. Property values increase at an average of 3 percent per year.
4. Gross rents remain the same for 20 years (unlikely, but this assumption gives you a cushion).
5. Rent is deposited in a non-interest-bearing bank account.
6. Refinance the property with a local credit union or bank at the end of year one and pull out the equity to repeat the process with another property the following year.
7. Tenants pay down your debt for you over time. As the debt is paid down and property increases in value, so does your equity.

Using these numbers, your $60,000 initial investment would be worth more than $256,000 at the end of 10 years. If you continue doing this for 20 years, your original $40,000 investment would likely grow to a seven-figure sum. That’s something you can’t do with stocks!

Obviously, these numbers are oversimplified – and there’s more risk involved than what is portrayed here – but it gives you an idea of how powerful this strategy is. Even with a few mistakes and bad deals, you can easily build a cash-flowing rental portfolio with this approach. 

Begin Building Your Real Estate Empire

Are there other ways to build a portfolio of rental properties? Absolutely! In fact, there are plenty of ways to do it much faster. But if you’re looking for a conservative, low-risk, and manageable approach that doesn’t require all of your time, money, and energy from day one – this is it! 

Whether you choose to use the Snowball Method, the One Property Per Year Strategy, or a combination of the two, your hard work will pay off. It may take a few years to pan out, but the results will come.