Bank of America just released the results of their latest Merrill Edge Report. In it they surveyed the “mass affluent”, those with between $50,000 and $250,000 of investable household assets. According to the survey, the Mass Affluent were more afraid of not having enough money throughout their retirement, than they were of losing their job, public speaking, or of going to the dentist.
These families are fearful that they will not have enough assets to last their lifetime. They are not able to even consider the lifetime of their children.
Wealth that Lasts
A good man leaves an inheritance to his children’s children, but the sinner’s wealth is laid up for the righteous. – Proverbs 13:22
Can you imagine creating an inheritance that will endure past your lifetime, past the lifetime of your children, and onto that of your grandchildren? How do we create something of lasting value that will transfer from our children along to our grandchildren?
While perusing the list of billionaires over at Forbes.com I noticed that 9 out of the 10 wealthiest individuals had started or grown companies. The lone exception was Christy Walton whose father-in-law Sam Walton founded Wal-Mart.
Unfortunately, for most of us “working stiffs” we are trading our labor or time for money. The problem with this model is that we only have a limited amount of time and labor. I have not figured out how to be in two places at once. I cannot simultaneously sit at my office computer and show property to clients across town. I am limited in my abilities, my time, and in my knowledge.
In one of his books, Robert Kioysaki expresses the idea of leverage. Leverage is using the efforts, time, or money of someone else to advance your cause. A non-profit can leverage connections in the community to advance their cause. An entrepreneur can leverage the time of his employees to solve people’s problems. A real estate investor can leverage a bank’s money to buy a bigger property.
Entrepreneurs and business owners leverage the skills, knowledge, and time of their employees to create a product or service that benefits more customers than the entrepreneur could benefit on his or her own. Collectively the entrepreneur’s business is better able to bless more people than they would if they were a disjointed entity.
Real Estate Leverage
One of the tools at the disposal of a real estate investor is leverage through the prudent use of debt. Many banks and individuals will lend money to an investor if the loan is adequately secured by real estate. A real estate investor can take a much smaller investment of say $100,000 and leverage that into the purchase of a property of $400,000. This can benefit an investor if the property appreciates. A 5% growth in value on a $400,000 property is $20,000. This means that the investor’s equity just grew by 20% ($20,000/$100,000 = 20%).
Warning: Leverage is a two-edged sword and can multiply losses as well. Be careful.
Principal reduction on the mortgage is a benefit received by the investor when the tenant’s rent helps to pay the monthly mortgage payment. Each month a small portion of the mortgage balance is paid down building up the investor’s equity regardless of what the market value of the property does.
Because rent is earned regardless of whether the landlord/investor is at the property, it allows an investor to generate “passive” income. (Real estate is rarely truly passive income. Work needs to be done to maintain a property.) As long as the tenant occupies the property or is bound by the lease, the investor is entitled to rental income.
Creation of Generational Wealth
Leverage and passive income allow an investor to build wealth that is exponentially greater than their individual earning capacity. Real estate assets purchased with debt, build equity as the mortgage is repaid with tenant rents. Rental income allows the investor to have multiple streams of income without cloning himself. Whether the income comes from a business or from real estate rents, it allows the investor to build wealth that can be passed along to their heirs.
To start building wealth with real estate that can outlast you and be passed along to your children, please give me a call at (925) 385-8798.
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