The answers were interesting. One person responded that it took luck. Another person responded that generational wealth has historically been reserved for people of certain colors. Another person suggested brown bagging lunch to save money. Another person said wealthy people had smart advisors that guided them. A few people (my kind of people) responded that generational wealth is most often created through real estate. And that my friends, is why I am writing this article.
My back story, condensed into a few short sentences, is a story of creating wealth, which will be passed along to my children, mostly through real estate, but also through business creation and diversifying investments. Neither my husband Darren nor I were given any “wealth” and had to work to create our current situation. I paid for my college and left law school with more than $80,000 of debt in 1997. Through the last 25 years, we have studied, learned, risked, succeeded, failed, laughed, cried, dreamed big, worked hard, shifted gears, pivoted, open businesses, closed businesses, and overall ended up in a good place. As my husband always says, “You only need to be right 51% of the time.”
Here are my tips to building generational wealth, from my own trial and error, from stories of my friends and clients, and from loving the concept of wealth building, especially through real estate.
Mindset
Before you begin writing your business plan for the next big thing, you must have an abundant and wealthy mindset. You must believe that money is abundant. That it is your birthright to have it, make it, keep it, circulate it, and enjoy it. That having abundance for you doesn’t mean that you are taking it from others. Understanding there is plenty to go around and money is just energy that is created, enjoyed, shared, and multiplied.
This sounds easy, but most people have unconscious beliefs about money that block it from flowing to and through them. Here are a few:
- Money doesn’t grow on trees
- You must work hard for money
- I never have enough money
- Only certain people have money
- Me being rich means I’m taking money from others
- Rich people are greedy
Any of these sound familiar? If you are like the Facebook commenter that thinks wealth is reserved for people with certain skin colors, that will be her truth. If you are like the Facebook commenter that luck is what you need, you better believe you are lucky, or you won’t be wealthy. Have you seen people who make money and then lose it all, over and over? These people have beliefs about money that keep them from claiming and keeping it as their own. Cleaning up these nagging beliefs that keep you from your own personal free flow of abundance takes self awareness and work, but is the necessary first step to be on your way to creating generational wealth.
Here are some resources I found helpful:
Cultivating a Wealth Mindset
People are at very different places in their lives, financial circumstances, education, etc. This article isn’t going to capture the millions of differing situations, challenges, education levels, geographic constraints, etc. So, before I get chastised for being “capitalist,” “libertarian,” “elitist,” or whatever other narrative is out there, let me first preface this section with a basic tenet.
I DIDN’T CREATE THE GAME – I’M JUST PLAYING IT. I’m not making judgments about how the economy works, I’m just telling you how I have seen others and how I have garnered “what is” to create wealth. If this makes you uncomfortable, please go back to Point #1 and consider what your money mindset is like.
In 1997, Robert Kiyosaki wrote the book, Rich Dad, Poor Dad. I believe that I read it in 1999 or 2000, and it changed my life. It entirely shifted my perspective about how people make money. For this article, I just read the reviews on Goodreads, and there are some people who are really angry about it, and are commenting that it’s too “capitalistic” and “simplistic,” and “not everyone can be a boss or landlord,” but let me tell you, 20 years ago, it was an accepted way of thinking.
Kiyosaki, in this book and subsequent books, also lays out the financial differences between being an employee versus a business owner. The U.S. tax code highly favors business owners and real estate ownership and treats business income and real estate assets differently than W2 wages. (Again, don’t hate the player . . .) With business write offs, depreciation, and pre-tax v. post-tax spending, you can see the benefits to being a business owner versus an employee.
Taking Risk and Embracing Failures
Let’s face it, some people have higher risk profiles than others. I have friends who tell me that they will always have a job because they want to know exactly how much money they are going to get each week, they need health insurance, and they thrive on stability. And you know what? That is perfectly fine!
There are others who cannot imagine working for someone else and will always be business owners and/or entrepreneurs. These people I call “unemployable.” Investing in assets that generate decent amounts of returns will require some risk tolerance. You cannot be guaranteed anything. The larger your appetite for risk, the more money you stand to make.
It’s taken me two pages of writing to get to the part where I’m going to talk about real estate, which is my passion. Real estate is the ONLY, and I mean ONLY investment where you can put down as little as no money (for a primary home) to up to 25% of the purchase price, yet enjoy the appreciation on the value of the entire asset. Read that sentence again.
To expand, if you want to invest $100,000 in stocks, you need $100,000. If you want to buy a $100,000 condo, you need $20,000 for 20% down. Let’s say both appreciate at 8% a year. After one year, you have $108,000 in stocks, and $108,000 condo. But you made $8,000 on $20,000 cash with the real estate and made $8,000 on $100,000 investment in stocks. The cash on cash return for real estate wasn’t 8%, but was instead 40%. Nice huh? Now imagine that the condo is one that you rented out and in addition to the $8,000 appreciation, you were able to generate $1,000/month in positive cash flow with tenants renting out the condo. You have now made $12,000 cash, $8,000 appreciation, and we haven’t even begun to take into consideration the tax benefits of real estate ownership.
Now, I also recognize that I’m writing this in January 2022 and real estate prices have skyrocketed. In my market, there isn’t any way to cash flow a property unless you are getting government kickbacks which have recently hit the scene for renting to locals. And even then, I’m not sure that there is any substantial return. However, there are still markets in the United States where investors are buying properties and finding positive cash flow.
Some resources you may find helpful if you are looking to purchase real estate as an investment:
The Long Haul
We have all heard the saying “the rich get richer,” but is there really a problem with that? If you have learned how to generate wealth, multiply your earnings, and invest wisely, you are of course going to continue to make money. And the more money you have to invest, the more you make. It’s common sense to me.
Many people might say that there is more month than money. For people who live paycheck to paycheck to struggle to make ends meet, creating generational wealth seems like an impossible task. There are going to be certain jobs that simply don’t pay enough for anyone to amass substantial amounts of wealth.
In Scott Trench’s book, Set For Life, he actually talks about how one can start at zero and build a real estate business. I know some people who picked up a side hustle, a second job, went back to school, created a side business, switched careers, etc. I have a mentor who said that a career in sales provides limitless income. The harder you work, the more money you can create. If creating wealth is your goal, and you are in a low paying job, then something is going to have to change.
People with wealth have to learn how to keep their wealth. Financial education and trusted advisors are almost always part of wealthy individuals’ lives.
Owning businesses, real estate, and investments require a good accountant. There are numerous tax advantages that the regular lay person wouldn’t know about – vehicle write offs, depreciation, pre-tax spending, etc. I always say that the tax code isn’t intuitive – the rules are arbitrary and made up. Having an accountant who can guide you through the best business decisions as you are running your businesses, as opposed to after you have made important decisions, is necessary.
Many people solely use investment advisors to manage their wealth. My thoughts on this are if investment advisors could really beat the market, wouldn’t they be on a yacht in the Caribbean instead of in an office on Main Street, USA? While you can and perhaps should invest some of your money with these types of advisors, it’s probably not going to lead to fast, high growth wealth. You may want to set up accounts for your kids’ college, or put some retirement money into a safe place, and this could be a great option for you. This is the slow and steady method of saving money, but sometimes it just might not be fast enough.
There are many ways to invest, but I always think real estate should be considered. When investing in real estate, I already mentioned that tax benefits exist for real estate investors. These include depreciation of the asset, writing off mortgage interest, and more. There is also a great tax tool called a 1031 exchange where an investment property can be sold and the proceeds can be reinvested into another investment without paying capital gains taxes on the appreciation/gain. We see many 1031 exchange transactions in my resort market since there are many investment properties.
Another reason that real estate can be a great investment is that it is a hedge against inflation. We are seeing inflation now in all areas of our economy. This translates into higher priced real estate and higher priced rents. If you buy a property ASAP, you will be locked into a price, an interest rate, and a monthly payment that won’t change for 30 years. You can feel safer knowing your housing costs when owning real estate as opposed to relying on a landlord who will increase your rent according to the existing economy, or sell your place and then you are homeless.
Smooth Sailing
What many sophisticated investors find is that once a certain level of financial comfort is reached, they can start to invest in even riskier investments with higher returns. Private placement investments are available for accredited investors.
These types of investments could be investing in large real estate holdings or in early start up businesses. These opportunities are not available to the general public due to SEC rules.
Finally, wealthy individuals take care of their wealth with trusts. No one wants to die without a will, because of the difficulty of probate, but wealthy people take it a step further and create revocable or irrevocable living trusts to protect their assets. Trusts allow for assets to be passed along to the next generation through the vehicle of the trust, without requiring the probate of any will.
Wealth is an individual pursuit unique to each family. I personally believe that “if it is going to be, it is up to me.” Relying on the government or others for financial security will not result in you being in control of your life and your future. If you would like to discuss your individual real estate needs, please set up a call with me on my calendly link.