There's a common misconception that most billionaires inherited their wealth. However, a 2019 study found that just 13.3% of billionaires inherited their total wealth, while a surprising 55.8% of the 2,604 worldwide billionaires were self-made. Many of those billionaires started out without the capital to self-fund real estate purchases or the credit history to easily finance them.
The very first practices of many real estate billionaires are doable for most individual investors. If you run a business, own your residence, or even have a tenant already, you're already further along in real estate investing than many Americans. Let's go over three ways that real estate billionaires got started in real estate and highlight how you can too.
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1. Affordable housing
Stephen Ross has a net worth of around $8.3 billion. He founded Related Companies, which has invested in over $60 billion worth of real estate over the past 50 years. Ross is also a majority owner of the NFL's Miami Dolphins.
Ross started in real estate investing with affordable housing in 1972. He mastered the art of developing and leasing housing that was subsidized by the government. By the 1980s, he owned multiple high-rise towers in several cities and had diversified into mortgage financing and property management.
Affordable housing is often the first foray real estate investors make into the market. Government tax credits are available to properties that lease a percentage of their holdings to people with low income, seniors or people with disabilities, students, military members, and rehab or reentry program participants.
While Ross took advantage of the tax credits associated with setting aside a percent of each property for affordable housing, individual investors can major in affordable housing and reduce vacancy or rent loss with programs like Section 8 housing.
The Section 8 housing program pays about 70% of rent for program participants, and that amount is directly deposited into your account each month on time. The catch is that you'll have to learn all the government regulations and follow them to a T. You'll also have to pass an inspection before the unit can be rented.
2. Fixer-uppers
Sam Zell managed 4,000 apartments when he graduated from college. Out of those 4,000, he owned at least 100. He and a friend started out by just managing the students' apartments but quickly learned the trade and started buying rundown houses to fix up and rent to students.
This was back in the 1960s. Nowadays, if you hear the word fixer-upper, you probably think of house flipping. House flipping is notoriously fickle, and not many real estate billionaires did it for long, or even at all.
Fixing up houses to rent to students can work out better. Instead of being reliant on market prices increasing, you just have to find a student to rent the place and pay enough to cover your mortgage payments. You could even potentially rent out part of a property while working on a different unit.
After the house is fixed up and you have a rent history on it, it will likely be worth more, even in a down market, because of the ability to use the income approach and the work you did, and you can take money out to buy a new property.
This method may sound familiar to a similar one called the BRRRR method (buying, rehabbing, renting, and refinancing houses and then repeating the process), which has recently gained popularity online. The key in both strategies is to keep both your purchase and fix-up costs down. That's incredibly hard to do right now with inflation over 8%, so if you can make it happen, you'll have an edge already.
3. Office buildings
While many real estate billionaires got rich on residential real estate, plenty of them used office space to get rich. Donald Bren, with a net worth of $16.2 billion; Edward Roski ($6.1 billion); John Sobrato ($6.1 billion); and Ted Lerner ($4.7 billion) all owe at least part of their fortune to office buildings.
Of course, there is a greater barrier to entry in buying office buildings than affordable housing, but the management is easier, and growth potential is higher. Once you get a few office buildings going and have a reliable rent roll, it's easier to keep investing in new properties.
The clearest path to success is if you're a business owner already. It makes sense for most business owners to own their buildings (for income in retirement). The best way to do that is to segment the office space out and start renting portions of it.
Every dollar that you're paid in rent is a dollar that you don't have to take away from your business. Likewise, if you have a business that makes enough to support the rent payments but likely won't grow much, you can leverage that cash flow to make debt payments while you buy more office properties.
How to get started
For these real estate billionaires, the type of real estate investing wasn't as important as getting started, doing it well, and compounding profits with new investments. Each of them had some level of expertise in their chosen area that gave them an edge. For Stephen Ross, it was tax credits, and for Sam Zell, it was fixing up houses. Figure out where your own circle of competence is, and let the compounding begin.
