You may remember an article I wrote a while back regarding what being a CPA has taught me about becoming a millionaire. I wrote that article because I am able to peer into the lives of financially successful men and women. In doing so, I’ve noticed trends in habits that these people possess and I wanted to share that with the world.
Since writing that article, I have continued identifying similarities among my most financially successful clients. I do this by harnessing my natural curiosity and turning tax calls into wealth-building Q&As. (Yes, sometimes I get too excited and forget that the client is calling ME for advice and not the other way around.)
Regardless, I want to share with you a revelation I have identified that honestly is not surprising, shocking, or head-turning. But it does go against the grain of what is constantly preached on BiggerPockets.
Ready for it?
Investing in rental properties will not be what generates your massive wealth.
There it is. I said it. If you want to generate massive wealth—I’m talking Grant Cardone levels of wealth (OK, maybe not that much)—rental properties will not be your primary driver of such financial growth. Let me explain why.
Investing in Rental Properties to Build Wealth Is Too Slow
I can’t tell you how many people come to me saying that they want to cash flow $10,000 per month. That’s an awesome goal, and there’s nothing wrong with it—except for the fact that you’ll need to invest roughly $800,000 (that’s equity, not market value) of cash to achieve that level of cash flow.
How long will it take you to save up $800,000? Years probably, maybe even a lifetime.
And that’s the problem with rentals. They simply don’t cash flow enough to generate massive wealth.
You may say that you can buy property at discounted rates, rehab, rent, refinance, and repeat. But we’re still looking at a long—very long, in fact—path to massive wealth generation.
The problem as I see it is scalability. You simply can’t scale a rental portfolio the way you can a business. It requires too much capital, too much planning and overhead, and too much time.
Sure, Rich Dad says that investing in rentals puts you in the correct “Cash Flow Quadrant,” but they don’t tell you that it’s going to take years—maybe even decades—of portfolio-building to create a solid stream of income that guarantees financial independence. They don’t tell you that you must painfully save to buy one rental property per year, which adds only $6,000 to your annual bottom line.
No one talks about how darn slow investing in rental properties will build your wealth. People only talk about how awesome rental properties are, mainly because they have something to sell you. And that something requires you to buy rental properties.
Turnkey companies are one of the worst abusers of selling you the dream of owning rental property. There are great ones out there, but they aren’t building a rental portfolio for themselves. They are building a business that sells the idea of owning rentals for long-term wealth to you!
If the companies claiming that rentals will build massive wealth for you aren’t buying rentals for themselves, what does that say about the product they are selling?
I feel sorry for the folks who have multi-million dollar net worth goals and think rentals will get them there quickly. It’s just not going to happen.
But I Never Said It’s Bad to Invest in Rentals
Now, I never said to avoid investing in rentals. And yes, the prior paragraph was intended to stir emotions so that I have your attention for the rest of the article. What I really want to do is encourage you to change your mindset.
I originally thought that scaling a rental portfolio was my ticket out of the corporate world. So I bought a three-unit property and was super excited about adding another income stream to my life. After that purchase, I was making an additional $700 per month.
The only problem was that I had tapped out my savings. So, I needed to save another $30,000 to buy another three-unit to increase my income by another $700 per month. Assuming I could do this once per year, I calculated that I could leave my corporate job in roughly 10 years.
Ten years?! That is way too long. True, it was a faster wealth-building formula than keeping my day job as my sole income stream, but it was just way too slow for me in terms of wealth-building.
I have since switched my mindset to growing my income and wealth in other ways. While I now own six units and want to continue to scale my portfolio, I decided that rental properties should act as a supplement to my primary wealth-building strategy.
Too many people think investing in rental properties will save their finances. They think that they can grow a portfolio and drastically increase their wealth in only a few short years. While it’s true that rentals are a fantastic source of additional income, don’t expect financial miracles.
To feel completely and utterly financially free will require a ton of work, a hard lesson about spending habits, and plenty of time. If you want to diversify your income streams, make yourself less susceptible to economic downturns and reap tax benefits, then rentals are still one of the best assets you can invest in.
But you need to understand what “investing” means. Investing is meant to be slow and deliberate—a steady increase to your overall net worth. Investing is not fast-paced, nor is it speculative.
Unfortunately, slow and steady rarely allows you to build massive wealth. That’s my overall point here. Investing in rentals is a great play, but it’s slow and deliberate. Anyone can attest to that.
What to Do Instead
If rentals aren’t the answer to generating massive wealth, what is?
After speaking with my wealthiest clients, all of whom own vast rental portfolios, it became obvious that none of them made the bulk of their wealth with rental properties. Literally zero of my wealthiest clients utilized rental real estate as a means to build their massive wealth.
Instead, they invest in rental real estate to diversify their income streams and continue building the wealth they already have at high rates. Investing in rentals came after, or was secondary to, building out a large net worth through other means.
Instead, here’s how they built their foundational wealth:
- They started, ran, and sold a business or multiple businesses.
- They were in a sales job that allowed them to quickly grow their income.
- They worked their way into a high-compensation job that always involved stock options.
True, there have been “investors” who used rental properties to build massive wealth. Some are even consistent contributors on BiggerPockets. But I’m arguing that they are building and scaling a business. They are raising capital, putting no money down, running multiple projects at once, hiring a team, and operating a full-scale business.
That is definitely not investing. Rentals are their product, and they are building a business around that product. That’s quite different than buying one or two rental properties per year.
Building a business will build wealth quickly. When you make a sale, not only do you get the cash flow from that sale, but your net worth also increases. Why? Businesses are valued in many different ways, commonly a multiple of gross revenues or net earnings.
CPA firms, for example, are often valued at 1.1 to 1.2 of gross revenues. So, if I add $10,000 in revenue to my business, not only do I keep 50 to 60 percent of that as hard cash flow, but I’ve also increased my net worth by $11,000 to $12,000, because I can theoretically sell that stream of revenue.
Anytime you read an article on BiggerPockets, ask yourself how the author is making money. Most of the authors here are running a business in the real estate industry. They are not taking a passive role by “investing” in real estate.
Look at BiggerPockets in general. They make money by providing a platform and resources for investors to talk about investing and building their net worth. Josh Dorkin, the founder, originally started BiggerPockets to ask questions about his own real estate investing. Once he realized the goldmine he was sitting on, do you think he really cared about aggressively building out his real estate investments? No!
And he would have been foolish if he had. He needed to spend his time and energy on growing a business, one that will generate massive foundational wealth. And he’s done a darn good job.
My point is that if you salivate (like I do) when you read articles or books about generating massive wealth and you are not running a business, you need a harsh reality check. I was there once, and I left one of the biggest accounting firms in the world to strike out on my own. I knew from a wealth-building perspective, it was more risky to stay in my “secure” Big 4 job than it was to build something on my own.
The great news is that building a business isn’t the only way to generate massive wealth. You can also do so via a sales or high-earning W-2 job. High earning, by the way, means $500K-plus. While a $250K salary is great, they are a dime a dozen among real estate investors.
The only problem with a sales or high-income job is that you cannot eventually sell your income stream. You have to focus on saving your net earnings or carefully exercising your stock options in order to build wealth. Compare that to the business owner who essentially “double dips” when they make a sale due to saving the cash flow and increasing the overall value of their business.
What’s the Point of Telling You All of This?
Too many brilliant minds are sitting in dead-end jobs because they are too scared to take a leap.
Imagine if 100% of all the brilliant, or even halfway brilliant, people took a chance at striking it out on their own and creating something. What would our world look like? How fast would amazing innovations occur? These are questions I sadly ponder as I think about some of the friends I made during my corporate career—brilliant people who definitely have what it takes to start and run a business but are content with their bi-monthly paycheck and not-that-fulfilling job.
Content. That’s a scary word. The only word that is scarier is mediocre.
Literally every person reading this article has the capability to start and scale a business. How do I know? You’re clearly interested in building wealth and improving your situation. You have tapped into the drive that many fail to ever find. Otherwise, you wouldn’t be on this site.
Start a business. Create something that people value, and learn how to deliver more than their expectations. You will live a truly satisfying life and will build an amazing legacy for your children and their children.
Your business can even be real estate-related, such as a brokerage, development, or private equity firm. It can be a supplement to real estate, such as a CPA, law, cleaning, or other services firm. You can start the majority of these businesses with a minimal investment, and you can even run them on the side of your day job!
But you must start some sort of business that you can later sell if you want to achieve massive wealth.
If you don’t have business-building in you, then focus on investing in real estate. But do it with a business mindset. Refuse to be satisfied with a 12% IRR. Aim higher—much higher.
Get creative in your real estate investing, and soon you’ll find that you’re running a real estate business under the guise of investing. You’ll crush it and be surprised by how far you can go in so little time.
Building out a rental portfolio, in my opinion, is an excellent way to build wealth. But to achieve lofty goals of massive wealth and true financial freedom without waiting decades to “get there,” you must build a business.
Investing in rental properties is a great way to build wealth, but it’s still relatively slow. Instead, start, scale, and sell a business to generate foundational wealth. That business can be real estate-related. Just tap into your current wealth of knowledge and get started.
My wealthiest clients made their wealth through high-income W-2 jobs, sales positions, or owning and selling a business. They then moved that wealth into real estate to create a consistent income stream and enjoy true financial freedom.
Many of these people live within their means and are not necessarily extravagant. You probably wouldn’t recognize that they are wealthy if you passed them on the street. But their wealth will outlast them and likely their next generation.
Investing in real estate should be slow and deliberate. It should be a focus but only a supplement to your source of wealth-building. Do not fall into the trap of thinking that investing in rentals will provide you with true financial freedom in a small number of years.
Do you agree with this assessment—or do you think rentals are a feasible way to build massive wealth relatively quickly?
Weigh in with your opinions below!
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.