Want to build wealth through property? First read these 2 ‘golden rules’ from a financially independent millennial

Real estate can be a powerful tool for building long-term wealth and Cody Berman is one example of that. The "Retire by 30" author says investing in property played a major role in helping him achieve financial independence.

The US-based entrepreneur's journey began with a house hack, a strategy that involves renting out part of your home to offset or even eliminate your housing costs. Over the years, he has followed two simple real estate principles that he credits with helping him and his spouse build wealth.

"I think house hacking is probably, on the expense front, the biggest lever you can pull bar none," Berman said in an interview with Business Insider.

He added that housing accounts for about one-third of the average American's paycheck. “If you can eliminate that or vastly reduce it — or, even better, if you can turn your housing into an income — all of a sudden, you gain a third or more of your monthly expenses back to invest in other things and build your financial freedom,” he told the news publication.

How house hacking helped him achieve financial independence

Berman's first house hack laid the foundation for a larger real estate portfolio. Over time, he started buying long-term rental properties.

By late 2021, just before turning 26, Berman said he had achieved financial independence. At the time, he had about $500,000 invested in the stock market and owned 13 rental units generating about $3,700 a month in cash flow. In addition to that, his digital-products business was also taking off, giving him more than $10,000 a month in mostly passive income.

Berman and his wife, Lauren, continue to use a version of house hacking today to keep the income flowing. They purchased property with a one-bedroom, one-bathroom house, plus a separate building with a four-bedroom, two-bathroom apartment and 600 square feet of office space. They live in the smaller house and rent out the apartment and office.

"Instead of paying $1,000, $1,500, $2,000 per month in rent, we actually make $800 a month from living here," he said. “And we don't share a wall,” Berman told the news publication.

Golden rules to build wealth through real estate

He also noted two key principles that have helped him and his wife to build wealth by investing in real estate over the years. Here's what he swears by:

— Use the 1% rule as a starting point: This rule suggests that a property's monthly rent should be equal to at least 1% of its purchase price to improve the chances of generating positive cash flow.

For example, if an individual buys a property for $500,000, the rule suggests the property should be able to generate at least $5,000 a month in rent.

Berman used this rule as an initial screening tool before buying a property. However, if a property fell short, the couple kept searching for other options: “That was our starting criteria. How do we find a place that meets the 1% rule?”

This meant expanding the couple had to expand their expand their search beyond the more expensive part of Massachusetts where they lived at the time. Their first rental property was located in Connecticut, where the price-to-rent ratio made more sense financially.

— Don't buy a property you wouldn't live in yourself: The second rule that Berman applied to his own journey is to not invest in properties or buy a house that they would not want to personally live in.

In the beginning phase of their journey, one of the properties looked strong on paper, he recalled. It was a $170,000 duplex that started cash-flowing right away, with about $2,250 in monthly rent and roughly $1,350 in monthly expenses.

"On a cash-flow basis, it was a home run deal," Berman said, but the property quickly became a headache. "The tenants were tattling on each other. We had a tenant who got arrested on the porch for drunk driving."

This particular experience changed the way the couple evaluated future deals in the real estate segment. According to Berman, relying on just strong cash-on-cash return and price-to-rent ratio isn't always enough and that you should look for properties that would attract reliable tenants and be easier to manage.

"We were like, we pay rent on time, we don't cause problems," he said. "We want people like us in our buildings, so let's just invest in places where we would want to live." Hence, before investing in a property, one should ask themselves: “Would we live here?” and it makes the decision-making process easier. He also told the news publication that this rule is one of their non-negotiables for the couple.