In my life I have met a lot of successful people, six figure earners and millionaires, self-made and some inherited. Today I wanted to talk about two things that I have reconized that true wealthy people have in common, they own businesses and they own real estate. These categories can be broken down even futher as there are different types of businesses to own (this lesson is important! ) There are owner operated businesses , and owner absentee businesses! Owner operated businesses means that the owner operates the business essentially working there to make sure it is running. Owner absentee business means that the owner does not work there and is absentee. In both cases , time is very important and in the second option of owner absentee business, many successful entrepreneurs create a profitable business system so that they don't have to be there and they could move on to start other business without selling or folding the first business. Personally I would rather have a business that nets $30,000 a year without having to do anything but check my bank account, rather than a business that nets $75,000 a year , and have to be there all the time. I have seen this strategy create millionaires, best case example being franchises (i.e. panda express, subway, 7-11, etc).
Real estate has historically created the most millionaires rather than any other industry in the world. This is why lenders give 30 year loans on homes for low interest rates, because real estate is a safe risk. Lets break this down even further! Lets say you buy a home for $100,000 today (not realistic in Bay Area, but for numbers sake we'll keep it low), and put $20,000 for a down payment. Your best friend, Bill, a stockbroker, is trying to tell you to put your $20,000 into the stock market just like he did. Lets say , one year from now, Bills stocks have gone up by an amazing 20% and your home has only gone up by a measly 10%. Bill brags to you why you should have invested with him, but here is why you win. You only put $20,000 down for a $100,000 home, and got a loan for the other $80,000. If you home went up by 10%, you actually made $10,000 on your $20,000 investment, a 50% return! If this home is a rental and the rent that you get pays your mortgage, then this means you have put nothing else in other than your down payment. Now take the same example and make the numbers $1,000,000 or $10,000,000 for homes (or commercial / residential real estate) and do the math. People that have successfully invested in real estate and held on to their investments are now millionaires. They buy good real estate (homes, apartments, or commercial) , let it grow, and over time reinvest their profits. Another reason real estate beats any other investment, is because you can sell your home and pay ZERO taxes (check with your CPA for proffessional advice). Through a 1031 exchange , you can sell your home , take the proceeds, and reinvest in more like homes and pay no capital gains tax. You may be asking how will you ever get the money out? You really don't need to get the money out if you keep building your portfolio of real estate , rents alone will make you money to put in your pocket. If you did want to get some money out tax free, you can take an equity line on your home. Heres a real example: In 2003 , my Arizona home was worth about $350,000 and of this I only owed about $130,000 on the mortgage. I took out an equity line for about $50,000 at 7% interest and paid about $400 a month on payments. My rents for the home were about $1400 and my mortage was only about $1,000/ month. This means that the rent covered my equity line and mortgage. I took the $50,000 and later sold the home and did a 1031 exchange to buy more properties. (please leave a comment if you would like more info)
The last part about real estate is the tax breaks at the end of the year. You are allowed to write off up to $25,000 in depreciation expense, meaning if your income was $50,000 for the year but you own homes that add up to the $25,000 depreciation , your reportable income now becomes $25,000. If you are at the 30% tax bracket that means you just saved $7,500 in income tax! This is probably the best part of real estate , and if you are a real estate professional , you can write off $100,000 or more! So everyone understands how crazy this is, I need to explain a little futher. Depreciation expense means that the govenment is saying that you can deduct cost for your home depreciating and losing value. The only this is that over a long period of time, real estate has never lost value! This is one of the best kept secrets of the rich and wealthy.
Real Estate is very simple if you keep it simple. Of course there are more types of investments like re options, foreclosures, flipping, syndicates, commercial leases , which are all great but a little more complicated. The mentor that taught me this simple strategy owns more than 500 residential homes and is worth over $50,000,000! The craziest comment I remember him saying is that he rents his 4,000 square foot home in Marin, because he says if he lives there it isn't an investment (tax breaks, mortgage, no income, etc)