Don’t Do THIS To Get Rich
I’m headed out on a press tour for my latest book, FAKE: Fake Money, Fake Teachers, Fake Assets, and in my mind, I’m already preparing for the usual questions from journalists. After doing these tours for twenty years, I could probably write the journalist’s questions for them.
Generally, they stay on topic and ask about the basis of the book and what readers will learn. There are some “smart” journalists who are trying to get their “gotcha” moment.
I’m usually compared to others in the financial field and questioned about my methods. In my opinion, one of the reasons millions of people lose trillions of dollars is because they are looking for easy answers as to where to invest their money. And there are many people ready to supply the easy answers, such as:
“Invest for the long term and diversify.”
“Cut up your credit cards and get out of bad debt.”
While this advice is good for someone without a financial education, I maintain that following this advice is one of the hardest ways to get rich—if not impossible. People with a job who put money into a retirement plan such as a 401(k) filled with mutual funds are taking the slow lane through life.
It’s like riding a bus with a worn-out engine. It does not go fast and does not ever reach the peaks of financial returns. It is a bus that has bad brakes, which makes going down hills terrifying.
While putting money into a retirement plan for the long term might be a good idea for average investors, to me, it is a slow, risky, inefficient, and highly taxed way to invest.
There Are Better Investments
There are four different asset classes: business, real estate, paper assets, and commodities. A simple investment is to put money into an S&P 500 index fund. For most mutual-fund managers, the S&P 500 is their benchmark to beat. Unfortunately, very few beat it.
That often brings up the question, “Then why do you need a fund manager if few can beat the S&P index? Why not just invest that money in the S&P index yourself?”
My reply is, “I ask the same question.” Continuing, I say, “If you invest $10,000 in real estate, you actually increase the basis of your investment using 90% leverage—in this case $90,000 of your banker’s money. In a typical decade of growth, $10,000 in the S&P 500 would increase to around $18,000. Your $10,000 in real estate, along with your banker’s money, would increase to nearly $158,000.”
I often hear people ask, “Then why don’t more people invest in real estate?”
My reply is,“Because to invest in real estate, you have to be a better investor. Investing successfully in real estate requires more financial skills and is much more capital-intensive and management-intensive. Getting into paper assets such as mutual funds is much easier, less expensive, and requires very little management, which is why so many more people invest in them.”
The Most Powerful Asset
The S&P 500 is an international market, while real estate is a local market. That means, if you are a savvy real estate investor, you can often achieve even higher returns in real estate. Your $10,000 in the S&P 500 would achieve the same returns as everyone else receives, while your $10,000 in real estate could either be much higher than $158,000 or much lower.
If you are a horrible real estate investor and property manager, you could lose the entire $10,000 you invested, and possibly even more. If you are not good at real estate acquisition and management, you would be better off investing in the S&P 500. Success in real estate depends upon you as the investor. Success in the S&P depends upon the S&P 500 companies.
To the question, “Can even higher gains than $158,000 be achieved from $10,000?” the answer is, “Yes, but to achieve those returns, an investor often needs to use the power of a business.”
Of the four asset classes, a business is the most powerful of all assets, but it requires the most skill to start, build, and manage. For a person who is good at building a business and also good at investing in real estate, ultra-high returns are possible.
How to Achieve Ultra-High Returns
One of the best-kept secrets of successful investors is not diversifying but integrating. Rather than just investing in one asset, successful investors integrate two or three of the asset classes, and then accelerate, leverage, and protect the cash flowing through the assets.
For example, Bill Gates became the richest man in the world by integrating the power of a business and the power of paper assets. He achieved the dream of many an entrepreneur, the dream of building a business and taking the business public through the stock market.
In other words, he turned part of his business into paper, often known as “shares.” If Bill Gates had not taken his company public, he would probably still be rich, but he might not have become the richest man in the world at such a young age.
Simply put, it was the integration of two asset classes that accelerated his wealth. He did not become the richest man in the world from a salary as a Microsoft employee who diversified his salary into mutual funds.
Donald Trump achieves greater returns on his money by owning a business that invests in real estate. And Warren Buffett, the greatest investor in the world, achieves extremely high returns by owning a business that invests in other businesses.
As Wayne Gretzky once said, you miss 100% of the shots you don’t take. If you never start investing, you’ll never reap the rewards and escape the rat race. So, allow me to quickly address the most common excuses:
Money: You have the money. You simply choose to spend it on other things. Instead, you should look at your budget and allocate the amount you feel comfortable spending on investments each month. Sure, you might have to cut back in other areas for a bit, but isn’t that going to help you reach your long-term goal?
Knowledge: Before you dive in, start off by doing research—I suggest starting with a workshop to educate yourself. Or tap into a trusted resource who has found success in real estate and ask them to be your mentor.
Confidence: You’ll want to find the right first property to begin, and this takes patience and number crunching. Pick an area where vacancy rates are low and choose a property that offers the amenities people are looking for.
Timing: If you’re investing for cash flow (not for flipping), the market direction really doesn’t matter as much. You aren’t hoping to earn a quick profit by selling before your mortgage paperwork is even dry. This is a long game, not easily affected by the ups and downs of the market.
Even if your goal is an ambitious one, chances are you can break it down into smaller, more manageable pieces.
And remember that really good goals require that we stretch, that we step outside of our comfort zones and meet a challenge. If your goal is truly important in your life, then it is worth the discomfort you may experience as you get started.
Editor, Rich Dad Poor Dad Daily