Explain it to me like I'm 5: How do you get rich in real estate? Seems like it takes many many years to get positive cash flow.

[Tyler W.]

Please help clear my mind from my skewed point of view of how REI works.

My goal is to buy a multiplex apartment building and live in one of the units. 

So I'm guessing that I'd have to put something like $50,000 down for that. That might take me 3 to 5 years to save. So I got the property, and I'm cash flowing a few hundred dollars a month. That's it?!? All that hard work for a few hundred dollars of "free" money? 

How do people make millions of dollars in passive income? Either they have to come from a family with money to bring big down payments to the table, or they have to save and save and live like a hobo for 30 years to build up enough cash flow. 

Convince me otherwise. I probably sound really stupid to a lot of you, but this is the beginner's forum, after all. 

[Charles Worth]

@Tyler W.

This is not stupid at all and I think its where many people end up because the dollars seem small and its a ton of work and at least I think a lot of risk when you start out. There are more experienced people on here that can probably give you the best answer but here would be my observations:

1) Living in CA I don't think your investment will be all about just cash flow. As far as I know there are appreciation assumptions you need to build in just like NYC or the investment is not going to work compared to investing in cash flow markets. My advice is stay conservative but build something in if you are set on that market

2) Total cash flow in your case probably includes principal payments which is really an investment in paying down the mortgage (i.e. an ongoing investment in the property every year) as long as that investment remains a good one that part is building equity

3) In your case you are talking about living in the unit. Either you can charge yourself "rent" to see what true cash flow or you can think of it as you are living for free. Assuming your property only pays for itself including ALL costs that is a big return. For instance, let's say it would cost you $2K a month to rent. Well that is $24K a year and if your property is paying all costs including the mortgage, well your return is 48% on $50K, that is pretty damn good. 

4) Many of those who got rich I would guess got rich more off appreciation than cash flow.  This is a different topic and it has been discussed a lot on BP. Just look for appreciation in the search box. BP tends to be a little anti appreciation and its definitely a bigger gamble but its where a lot of people made a lot of money esp. when they bought to live because they bought in better areas that went up. 

5) In this case if you are buying a larger multi unit the big gains come from making improvements to the rent, the cost structure, etc. Larger multis are sold on the basis of income so if you increase NOI, the value increases. So let's say you buy this unit and improve it to the point that you can sell it in 4 years, than you roll your improved price into a larger multi occupy the larger multi, improve that and all the while you are living for free. Keep doing this for a while and you can make a lot of money.

6) Owner occupied units that are less than 4 total units get loads of preferential financing so you can put down less money. You may be able to put down less than $50K.

7) Finally, many good investors put down little to no money on their deals either through raising capital from others, no money down strategies or unique techniques. All are discussed here on BP. 

@Brandon Turner wrote a book it that you can find here and writes on it a lot.

http://get.biggerpockets.com/nomoneydown/