How do people amass large amounts of wealth?
Wysox, PA · Member since 2014 · 2 posts · 1 vote
How do people amass large amounts of wealth?
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Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
12yOTOH, if you bought those same five rentals in 2005 you would have taken a beating that you may never have recovered from. Having the foresight to buy in the right area at the right time really comes down to just luck. Plain and simple. Lots of people are buying properties all over the country all of the time. The vast majority never see the sort of appreciation @Jay Hinrichs is talking about. But those that do make a great story.
You accumulate wealth by simply spending less than you earn. That works whether you're making $10 an hour of $100. As does the reverse. If you spend more than you make you will never accumulate wealth. Just because someone lives in a fancy house and drives a fancy care doesn't mean that have great wealth. They may well be in hock up to their eyeballs
I believe such stories are very, very rare. Going from a zero net work to a net worth of $5 million in 15 years requires two things: Saving money and generating a return on that money. While its not impossible to generate a big return, like 20% on a few rentals, buying enough of them to generate $5 million in wealth would be, I will claim, difficult at best. Look at the cap rates on NNN and large apartment complexes. These are, at best, in high single digits.
In commercial investing you often hear the term "total return". In addition to the cash flow from an income producing property, total return includes the principle paydown. It doesn't include appreciation. If you look at the long term Case Shiller data, appreciation roughly matches inflation. Of course there are exceptions like Jay mentions. And exceptions that go the other way. Pity the person who bought the same dollar value of property in Detroit during the 80's.
So, to accumulate $5 million over the course of 15 years, here are some ways to do it. I'll assume inflation of 3% but I'll assume your contribution is the same each year in nominal dollars rather than increasing with inflation. I assume you put in your contribution each year at the beginning of the year, you earn the specified rates of return on your entire balance and new contributions for the entire year, and inflation increases the value of your holdings for the entire year.
Given those assumptions, you need to contribution $60,000 each year with a return of 15%. After 15 years you will have $5.26 million.
I think 15% is quite high to be earning over the long term for a large portfolio, so to get there with a 10% return (which I still consider high) you need to kick in $100K per year. That get you to $5.29 million.
Now if someone is making $100K a year that aren't likely to save $100K a year. Lets assume they might save $20K a years and earn that 10% return. That gets them to $1 million after 15 years.
I wrote a long paragraph about the combined effects of inflation with leverage and then the loss of that effect as you pay your properties down. But I suspect I've already lost many readers. Suffice it to say this is a complex calculation that requires a bunch of assumptions.
My point is that if you want to accumulate $5 million or more, the way to do that is to invest your cash into something that earns returns. There really is no shortcut.
If you need cash to invest, you have to have income. You may get that from a real estate job, like wholesaling, fix and flipping or many others. Or you may have some other skills that generate more income than a RE related job.
25 Replies
- 12yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
David I think this Is a regional thing.. 5 to 10 mil net worth's is fairly common on the west coast and East coast NY Boston type places.. not to mention Texas .. there are always many many people with those kind of net worth's in every city above a few hundred thousand in the US..
Just many more in the high dollar RE market.. To put it in perspective if you bought 5 rental houses in Cupertino CA,, Palo Alto , Los Altos Menlo Park or any other SF peninsula town including the City itself. Back in the 80s and they are paid for it would only take 5 to 10 of those and your worth 5 to 15 mil right there. And there are hundreds upon hundreds that own that many or own multi and have those kinds of Net worth..
Now take the mid west and buy 5 to 10 homes back in the 80's and have them paid for and they are probably worth no more than 300 to 800k.
That's the difference and why I say its regionalized ..
And by the way you could buy homes in Cupertino an Palo Alto in the 70's for the same price you could buy a home in Kokomo Indiana. they were 20 to 30k back then today they are 1 to 2 mil.. the houses I Kokomo are 30 to 60k ... So there you go.. Its a birth right.. born in CA and invest there your rich born in the mid west and invest there you need 20 to 100 homes to get a nice net worth.
- Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes12y
You use leverage and then put appreciation and principal paydown together and a lot of things can happen as long as you are patient and persistent
- Developer · Decatur, GA · Member since 2011 · 1k+ posts · 1k+ votes12y
@Andrew Syrios and @Jay Hinrichs
Ignoring the potential of appreciation and emphasizing the 2% would lead to mediocre wealth.
Real wealth comes from opportunistically leveraging your assets (income, brains, network, and equity) while mitigating risks. I suspect self-made real estate millionaires will all say there were a few people, deals, and decisions that were the fuel behind their success.
I'm fond of Warren Buffet's quote, "The greatest invention in the world is compounding interest."
Going too fast is a real wealth killer as is going too slow.
- Wysox, PA · Member since 2014 · 2 posts · 1 vote12y
How much leverage do you figure success real estate investors (as defined in my original post) employ -- more than the typical 5:1 or 4:1 that can be found in ordinary mortgages?
- Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes12y
OTOH, if you bought those same five rentals in 2005 you would have taken a beating that you may never have recovered from. Having the foresight to buy in the right area at the right time really comes down to just luck. Plain and simple. Lots of people are buying properties all over the country all of the time. The vast majority never see the sort of appreciation @Jay Hinrichs is talking about. But those that do make a great story.
You accumulate wealth by simply spending less than you earn. That works whether you're making $10 an hour of $100. As does the reverse. If you spend more than you make you will never accumulate wealth. Just because someone lives in a fancy house and drives a fancy care doesn't mean that have great wealth. They may well be in hock up to their eyeballs
I believe such stories are very, very rare. Going from a zero net work to a net worth of $5 million in 15 years requires two things: Saving money and generating a return on that money. While its not impossible to generate a big return, like 20% on a few rentals, buying enough of them to generate $5 million in wealth would be, I will claim, difficult at best. Look at the cap rates on NNN and large apartment complexes. These are, at best, in high single digits.
In commercial investing you often hear the term "total return". In addition to the cash flow from an income producing property, total return includes the principle paydown. It doesn't include appreciation. If you look at the long term Case Shiller data, appreciation roughly matches inflation. Of course there are exceptions like Jay mentions. And exceptions that go the other way. Pity the person who bought the same dollar value of property in Detroit during the 80's.
So, to accumulate $5 million over the course of 15 years, here are some ways to do it. I'll assume inflation of 3% but I'll assume your contribution is the same each year in nominal dollars rather than increasing with inflation. I assume you put in your contribution each year at the beginning of the year, you earn the specified rates of return on your entire balance and new contributions for the entire year, and inflation increases the value of your holdings for the entire year.
Given those assumptions, you need to contribution $60,000 each year with a return of 15%. After 15 years you will have $5.26 million.
I think 15% is quite high to be earning over the long term for a large portfolio, so to get there with a 10% return (which I still consider high) you need to kick in $100K per year. That get you to $5.29 million.
Now if someone is making $100K a year that aren't likely to save $100K a year. Lets assume they might save $20K a years and earn that 10% return. That gets them to $1 million after 15 years.
I wrote a long paragraph about the combined effects of inflation with leverage and then the loss of that effect as you pay your properties down. But I suspect I've already lost many readers. Suffice it to say this is a complex calculation that requires a bunch of assumptions.
My point is that if you want to accumulate $5 million or more, the way to do that is to invest your cash into something that earns returns. There really is no shortcut.
If you need cash to invest, you have to have income. You may get that from a real estate job, like wholesaling, fix and flipping or many others. Or you may have some other skills that generate more income than a RE related job.
Originally posted by @David Easing:
Hello,
I've spent some time reading these forums and more than once I've heard of middle or upper middle class real estate investors amassing large amounts of wealth, $5-10M net worth, over periods of 10 or 15 years.
I'm assuming that such results are obviously the exception to the norm but still, has anyone come across deal outlines that show such returns? If not, how do you imagine an investor could accomplish these results?
Welcome to BiggerPockets, David.
As Jon H points out, accumulating $5-10mm is rare. That really takes you into to the top 1% of Americans, and possibly into the top 1/10 of the global top 1%. Add to that. accomplishing it in 10-15 years, makes it even rarer. Let's say for the point of argument, 1 out of 1000 Americans do this. That's still 317,000 people, so obviously doable, though difficult.
I'd guess that the largest group of people that do this are small business owners. People that have service businesses; restaurants, car washes, dry cleaners, IT companies, contractors, health care practices, real estate brokerages, real estate developers, law firms, etc. These small businesses throw off good cash flow each year. Maybe $400K-$1.5mm annually. The owners reinvest most of it, either in their core business, or in other investments. Some reinvest in real estate. Invest $400K a year into real estate that is earning/growing 10% per year and you are there in 10 years.
So the real estate is the easy part. The hard part is building the healthy small biz that throws off the cash. Maybe more of the focus should be there, especially in the first part of people's careers.
Sure there are other ways to get there, but I think the small biz owner track is the most common.
- Real Estate Agent · Winter haven, FL · Member since 2011 · 572 posts · 336 votes12y
Andrew,
I think the reading the "Millionaire Real Estate Investor" by Gary Keller might be a good read for you. This book will easly help understand the concept of building wealth. In real estate it is a very easy thing to accomplish a portfolia of that size. especially at $100k - $250k per residence, plus appreciation and cash flow. Building a networth is easy even at the rate of acquiring 1 property per year. Some just chose to acquire 1 property per month. and build faster.
- Investor · San Antonio, TX · Member since 2014 · 129 posts · 79 votes12yOne at a time.
- Real Estate Investor · Fort Wayne, IN · Member since 2013 · 168 posts · 78 votes12yThe best way to amass large amounts of wealth is create multiple streams of income. Generally speaking, the poorest people rely strictly on one source of income and with that income focus on providing their families with a comfortable life style (boats, new cars, yearly vacations, designer clothes, etc.) When their job is suddenly gone or some medical emergency keeps them from work that one source of income can no longer sustain the lifestyle they've become used to. When you work and invest in real estate, (which can be exhausting) it gives you time to build that stream of income so that its more reliable. Then you can go off on your own and start a business or make money in real estate through other avenues. The key is having multiple streams of income so that your never stressed about one. I read someone's Facebook page today and she said her goal is to have 10 different streams of income/unique markets so that she truly has built lasting wealth.
- Rental Property Investor · Louisville, KY · Member since 2008 · 342 posts · 123 votes12y
One thing about statistic though. If 1 out of 1,000 people can be millionaires out of that 1,000 how many people actually take the time to educate themselves and put forth the effort 110% to achieve their goals and are willing to take some risks? I would imagine it is very small compared to the whole.
IMO it has more to do with the person and how much effort they put into it. Everyone wants to be rich but very few are willing to put in the time and effort to be rich, especially once they hit the first bump in the road.
- SFR Investor · Stillwater, OK · Member since 2014 · 168 posts · 37 votes12y
Thought I would toss this in... :)
I usually tend to think Wealth = Net worth
My wife believes Wealth: peace of mind and free time to do as you choose.
When I have a lot on my plate and Murphy's Law is biting my butt over and over
I agree with her definition of Wealth.
What amazes me is how many high income people are not wealthy.
I think that's @Michael J. 's point - I mean how proud can you be to get into the top 10% of wealth, when 80% of the people are actively avoiding it by buying every shiny doo-dad they see on TV?
- Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes12y
Because I'm so old and not a techie, I have a tough time giving David exact particulars, but if someone is tech savvie then extrapolate this for me. What is 2.8 million dollars from 1979 worth today? I've been pretty open on my background by way of threads, Book and presentation at BP Summit. I know it could be done then, and think it could still be done today.
There were a lot of methods that helped me and they aren't used much Today. Here is just one. There are many more.
Put some RE syndications together as the GP. Big ones. Find less than 10 investors with 1 million each. Buy a 40 million dollar building with 25% down. Take your FULL commission in the form of a 2nd (6% is 2.4 million).
Do this twice. You are now worth 4.8 million. You do need to take into account the following:
1. Small portion go toward taxes...
2. You need to have the ability to sway 10 people your direction.
3. Follow ALL SEC and other rquirements.
4. No money raised for reserve.
5. have the ability to qualify for that 30 mil loan.
6. Convince lender you can burden the property with 6% more debt.
I wanted to show how "easy" this is. If it was easy, everyone would do this. I do believe there aren't as many paths to reach this as when I was younger. I also believe there are more GIGANTIC pools where you can find investors today.
Rich
p.s. I've wondered a few times what is 2.8 million in todays' dollars. Thanks.
- Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes12y
Bureau of Labor Statistics CPI Inflation Calculator
According to that calculator $2.8 million in 1979 is $9.05 million today.
I would have to disagree with your statement, @Rich Weese that people aren't putting syndicates together these days. They are.
I think that's a lot more challenging to do than you make it out to be. If you've never done a single deal I think its just about impossible to put together the deal like you describe. You have to work your way up to 1) have to ability to find such a deal, 2) have contacts with people who would invest in that deal, and 3) have the finances to do the leg work that requires up front time and money.
I do think that just plain luck has a big factor here. Hard work and knowledge is required. You're unlikely to become wealthy without those. But those factors alone won't get you there. You have to do the right deals in the right place at the right time to truly make money. Big or small, many things can go wrong with these deals.
My point is you have to be prepared to fail. Maybe again and again. Every failure teaches you something and gets you closer to that winning deal.
I also agree with this sentiment:
People ask all the time "when can I quit my day job". And the answer is very much "it depends." Wealth generates income in the form of returns. If you goal is to live off those returns, you need a big enough pile to support your lifestyle. The size of the pile will be very different if your lifestyle is an apartment facing Central Park and expensive vacations than if its living in a dirt cheap area in the center of the company.
- SFR Investor · Stillwater, OK · Member since 2014 · 168 posts · 37 votes12y
People ask all the time "when can I quit my day job". And the answer is very much "it depends." Wealth generates income in the form of returns. If you goal is to live off those returns, you need a big enough pile to support your lifestyle. The size of the pile will be very different if your lifestyle is an apartment facing Central Park and expensive vacations than if its living in a dirt cheap area in the center of the company.
I agree 100% ,It depends on your life style!
I have family members and friends who live it up ,they want best of everything ,and take many exotic vacations and some are out of control.
They don't want to keep up with the Jones they have to top them
They need at least quadruple the income we do just to support lifestyle.
And by most folks standards they appear wealthy
- Investor and Commercial Real Estate Agent · New York City, NY · Member since 2013 · 109 posts · 67 votes12y
Here is an article I've saved which can contribute to this questions.
Originally posted by @Elizabeth S.:
The best way to amass large amounts of wealth is create multiple streams of income. Generally speaking, the poorest people rely strictly on one source of income and with that income focus on providing their families with a comfortable life style (boats, new cars, yearly vacations, designer clothes, etc.) When their job is suddenly gone or some medical emergency keeps them from work that one source of income can no longer sustain the lifestyle they've become used to.
When you work and invest in real estate, (which can be exhausting) it gives you time to build that stream of income so that its more reliable. Then you can go off on your own and start a business or make money in real estate through other avenues.The key is having multiple streams of income so that your never stressed about one. I read someone's Facebook page today and she said her goal is to have 10 different streams of income/unique markets so that she truly has built lasting wealth.
that's a really good analysis..
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes12y
I'd disagree with Jay as to the Midwest needing to be born with a silver spoon, that's just totally uniformed.
I had a government job when I took off on my own, I actually switched gears from expecting to be a stock broker to the mortgage business and RE full time. My money was pretty well tied up and I had moved, had personal issues that tied up what money I had. I borrowed the license fee to get started, so in reality I'd say that was from ground level. What I had was knowledge, not money. In 18 years I surpassed your ideas of wealth, but not mine, but how do you basically do it?
Determination and discipline you need to be willing to work hard, all the time thinking about your goal. You identify a market specialty and command that area, the market has to have potential. Need a little eye of the tiger and be hungry for what you do.
Education allows you to do anything in that area of the industry. We can all identify what areas may have contributed the most to what we did, that can only happen after the fact! If you select the right niche up front, you're lucky. You need to be able to adapt and be flexible, taking advantage of the opportunities in front of you, your education allows you to make opportunities.
Discipline in your finances, put it back in what you do, not what you want to do. I waited a long time for cars, boats, second home, clubs, flying off to the beaches. Earn-save-invest/reinvest, earn, then repeat.
When a plan works, stay with it, when you get bored you can do other things, but don't abandon what works, care for it first then dabble.
If you are an entrepreneur in RE you don't make yourself wealthy, other people make you wealthy. It takes contacts, the right people around you, supporting you and pushing you. If it hadn't been for others I wouldn't be where I am, I didn't invent the wheel as much as I knew which way to roll it.
My lending led to partnerships which led to other industries, but finance and RE was the anchor. Diversification using your resources, knowledge and skills will be part of the mix for any really successful person.
Learn to protect what you gain, get experts involved in protecting your assets and your interests, no one tries to take away from a poor man the big gains to be made by others are taking away markets and customers from those that are successful.
Conduct yourself wisely, especially around others who are successful and play your cards close to your chest, don't tip your hand. Be able to apply those people skills as appropriate in your surroundings. Don't brag, I really dislike braggers, they are often new money types lacking self esteem feeding an ego, it's an indication of greed and greedy people are often an easy touch in finance. Really wealthy people don't flaunt what they have, they conserve, protect and manage their image as well as their wealth. Pride is quiet. The thought of the old fat guy smoking a $500 cigar at the club, bragging his azz off is usually one not the picture of a successful person, as he likes people to think, he'll also be sure to be setting himself to be taken down by those with means. The trade off is impressing the unknowing who may worship that perceived success but there are always others in competition. The wiser ones know better and allow fools to be foolish. Recognize, there are always wealthier folks than you are.
Not saying that demonstrating success can't be a good thing, but it's how you go about doing it.
Being self made has aspects of life challenges not just financially and in business but socially, ethically, religiously (if inclined) and personally as to your outlook on the bigger picture. You can have rough roads in all these aspects so you need to recognize them, manage them and in some cases overcome temptations that are counter-productive, not only in your business but in your personal life, you will find relatives you've never met. On the way getting there, you may need to have a family meeting too, manage that anyway you like, I'd not allow others to think you're the family vault, family is always family.
Then you can retire, everything changes and you won't need to give two hoots if you don't care!
There, you got my opinion! :)
.
- Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes12y
Thanks for the #'s Jon and Jon.
Jon H- I was trying to simplify just the method so it would be understandable, rather than a long discertation. I certainly wasn't minimizing the difficulty. I listed only a quick easy six problems and put "easy" in the forefront. Rich
p.s. from experience though, when you start being extremely successful, EXTREME money does follow you.
- 12yMike HurneyPro MemberReal Estate Investor · Boston, MA · Member since 2009 · 2k+ posts · 545 votes
@Bill Gulley Yes Bill, it is that easy;-)
- Philadelphia, PA · Member since 2014 · 1 post · 0 votes12y
I don't mean to hijack this thread but I have similar goals as described by the original poster. I have approximately $150k a year to invest in real estate and I aim to amass as much wealth as possible. It seems, however, that buying and renting single or multi-family homes would run into some sort of scaling limit, while larger apartments or commercial properties would, by virtue of their value, necessarily require syndication. Frankly, I'm not sure if I possess the salesmanship or experience to convince individuals to invest their millions into my ideas. I understand that tenacity and luck play a large role in attaining this type of success, but it seems flat-out impossible. How does one start from an upper middle class background and build eight figure business deals in a single lifetime, let alone a few decades?
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes12y
Originally posted by @John Evans:
I don't mean to hijack this thread but I have similar goals as described by the original poster. I have approximately $150k a year to invest in real estate and I aim to amass as much wealth as possible. It seems, however, that buying and renting single or multi-family homes would run into some sort of scaling limit, while larger apartments or commercial properties would, by virtue of their value, necessarily require syndication. Frankly, I'm not sure if I possess the salesmanship or experience to convince individuals to invest their millions into my ideas. I understand that tenacity and luck play a large role in attaining this type of success, but it seems flat-out impossible. How does one start from an upper middle class background and build eight figure business deals in a single lifetime, let alone a few decades?Welcome to BP, John!
Nothing against buy and hold or in developing, your age and amount of time to devote will certainly be a factor. Certainly you have the social skills to achieve your goals, moving up a few more rungs on the ladder from where you are shouldn't require a great awakening socially.
It's not about salesmanship, it's about sharing knowledge, giving others opportunities to profit along side you. I never sold a property in my life, I may have sold the benefits of ownership but the properties sold themselves.
I may have sold my position in how I invested, as to how methods worked for me, I never told, much less sold, anyone the idea that my methods were right for them. People are greedy, they naturally try to engage with success, simply provide the opportunity, show the risks and alternatives and they will make the right decision. It's about the game, not about the money, the game well played provides the money as a reward.
You might consider lending or notes, your available income may allow you to take that route. :)
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