What is Wealth (and How Can You Acquire it)? The Answer is Simple.

by | BiggerPockets.com

It’s been sought after and clamored for throughout recorded history. People are killed for it everyday, and some say it’s the motive for every war.

Wealth.

Though virtually everyone seeks it, I wonder how many have stopped to consider what it really is.

You may have joined the BiggerPockets community to find your own path to this often elusive goal. But have you taken the time to first define what wealth actually is?

This is really a simple article, and honestly, I could have summed it up in one paragraph. Maybe even in a sentence.

I’ll get to that one sentence in a moment, but first, let me tell you where I’m not going in this particular post.

Those of you who know me know that I am first and foremost a spiritual person. My faith drives everything I do. My family, my goals, my business, income, and giving are all defined by otherworldly priorities. (I’ve written on this topic before.)

I could make a case that true wealth is giving back. Like Ebenezer Scrooge learned on that fateful Christmas eve, most of us know that enriching the community and loving others will bring us the most fulfillment in this life.

I have chosen a path of investing my time, talent, and treasures to change the world for the better. I consider that a wealthy life.

But that’s not my point here.

I want to discuss the nature of true wealth in the material sense. And I believe that having this form of material wealth will provide you more options to attain wealth in the eternal sense. Options that sometimes elude those whose days and nights are consumed by merely making ends meet.

wealthy-habits

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What is Not True Wealth?

Whether we admit it or not, I think we are all susceptible to believing that those with fancy homes and expensive cars have attained true wealth. It’s easy to mistake the material trappings for true wealth, and while these may be an indicator of wealth, these symbols in themselves are not wealth. And we all know people who have faked it in an effort to look the part.

I recall the time I bought a late model Mercedes when I was in a particularly lean financial season. I was catering to those with wealth in my work role, and I reasoned that I needed to look the part.

I pulled into a private event (I was a speaker) with dozens of high net worth investors and assumed I’d fit right in. I was surprised to see that the average car on the lot was a Toyota. There were a few Volvos and BMWs, but more Chevys and Fords. (Was I at the wrong place?)

I noted the same thing in the parking garage at Google headquarters in Mountain View California recently.

Many (admittedly not all) who have attained true wealth have nothing to prove in the realm of showy material possessions.

And many BiggerPockets readers are aware that a pricey car and other tokens of wealth are often not assets anyway. They are depreciating liabilities.

Actually, in many cases, they are assets—of someone else: the local banker. They provide a profitable income stream for him, and so you become the means to increase his or her wealth. (How does that make you feel?)

Related: Millennials Are Poised to Be the Wealthiest Generation Yet: Here’s Why

So, What is True Wealth?

Like I said, this could have been a very short post. I can summarize this in one sentence. Even better, one short equation. For you, learning this equation may be more valuable than understanding E=mc2. Here goes:

Wealth = Assets That Produce Income

If you don’t read any of my other rambling below, I hope you will recall this simple equation. And I hope you think about its implications for your business and investing.

If you do wish to read on, I’ll develop a few more thoughts about my thesis.

Attaining assets that produce income means owning things that other people are willing to (actually must) trade a portion of their labor and income to obtain.

Timber is needed for housing and a thousand other things required by society. My son, Jonathon, has acquired land that will produce timber for the rest of his life. He owns assets that will produce income.

Other useful items are commercial buildings, rentable single family homes, mineral rights, and cropland. These are assets that can often produce income without full time effort on the part of their owner. These are assets that people must utilize in order to eat, live, work, and get around.

The more income-producing assets you have, the wealthier you are. And the more assets you have that are insulated from downside risk, the better.

I enjoy reading Robert Helms and Russell Gray, aka The Real Estate Guys. Here’s a relevant excerpt from one of their recent posts:

Intoxicated investors look at their balance sheet and celebrate their net worth … perhaps even borrowing heavily to spend on consumption.

In fact, this is EXACTLY what the government and banks WANT you to do.

Sober investors look at their balance sheet as merely a tool for building their CASH FLOW statement.  Spending comes out of the productivity of the asset … not it’s equity.

This is no small differentiation … because what you do with equity defines you as an investor.

The investor who buys low, sells high, skims some spending money, then pushes the stack back in and rolls the dice again, needs to keep playing the game … or the cash flow stops.

You can be a full-time investor, but you’re still on the treadmill.

The investor who buys low, then uses equity gains to acquire streams of positive cash flow will eventually become free from the need to personally produce to eat.

Robert Kiyosaki calls this “out of the rat race” … and it’s an enviable place to be.

The world is awash in paper (balance sheet) equity right now … in stocks, real estate, and now cryptos.  None of them are bad.  Equity is awesome!

But the market giveth equity … and the market taketh equity away.

We think it’s smart to take equity off the table before Mean Mr. Market takes it first … and then use your new equity to acquire productivity … cash flow.

It’s even better when you can pair equity with cheap long-term debt, so you can own MORE units of real value (properties) and income (tenants).

Of course, the right real estate is an ideal vehicle to acquire an income producing asset with cheap long term debt. If prices decline, the income provides a basis of value and control. And if prices take off, your bigger collection of assets will create even more equity faster.

how-to-value-multifamily-property

8 Characteristics of Desirable Assets that Produce Income?

  1. Produces stable, predictable cash flow.
  2. Resistant to market cycles.
  3. Tax-advantaged.
  4. Able to be safely leveraged.
  5. In perpetual demand and not dethroned by the latest technological innovation, the mood on Wall Street, or a war in the Middle East.
  6. Doesn’t decline in value (may not skyrocket, but at least keeps up with inflation).
  7. Low hassle. Generates income largely on its own.
  8. Can be passed along to next generation.

How Does This Apply to Real Estate Investing?

I’ve done a variety of things as an entrepreneur. In the real estate realm, I’ve operated as a residential real estate agent, a builder, a residential and commercial developer, a house flipper, a waterfront lot flipper, and the co-founder of a multifamily syndication firm.

While I believe that any of these paths (and many others) can be a route to wealth, I see a particularly strong fit in the attainment and operation of commercial multifamily assets.

A number of years ago, I stood at a crossroads in my real estate career. I wasn’t sure what to do next. I reviewed what I had done and realized that:

  • When I was a residential real estate agent, I was always dependent on the next deal.
  • When I flipped homes, I was always dependent on the next deal.
  • When I flipped waterfront lots, I was dependent on the popularity of a waterfront resort. No one had to have a lake home. (You can imagine how that worked out in 2008.) And I was always dependent on the next deal.
  • When I was a builder, my profit and sanity were dependent on finding and managing a very unreliable crew of guys whose priorities were not in their craft. (I’m saying that very nicely.) And I was dependent on the next deal.
  • When I developed and sold-off a subdivision and a ground-up multifamily facility, I was rolling the dice on land, permits, construction, the local economy, and a variety of other factors. And I still needed the next deal.

I’ve chosen the path of acquiring commercial grade multifamily properties because they really are assets that produce income. I view large scale apartments as the perfect investment because they fulfill most of the criteria I am looking for in an asset that generates income.

So, by my definition—in this article at least—commercial apartment owners are the holders of true wealth. Multifamily assets are:

  1. Producers of stable, predictable cash flow.
  2. Resistant to market cycles.
  3. Tax-advantaged.
  4. Able to be safely leveraged.
  5. In perpetual demand, and not dethroned by the latest technological innovation, the mood on Wall Street, or a war in the Middle East.
  6. Resistant to declines in value (may not skyrocket, but at least keeps up with inflation).
  7. Low hassle. Generate income largely on their own. (I freely admit this is my weakest point on this list, but a great property manager makes its management easier than many other assets.)
  8. Can be passed along to next generation.


Related: 7 Core Tenets of Investing Successful Wealth-Builders Know to Be True

How Can You Attain True Wealth?

You are in the right place to find out. There is no other resource on the planet like BiggerPockets! This amazing site has thousands of posts, forums, comments, and resources that will point you down the path toward attaining wealth. Whether you choose to take the commercial multifamily path or any other, you can find out all you need from the people, posts, and resources at BiggerPockets.

So what do you think? Do you agree with my conclusions about the nature of wealth? And what paths have you found to attain it?

Let’s talk! Comment below.

About Author

Paul Moore

Paul is author of The Perfect Investment – Create Enduring Wealth from the Historic Shift to Multifamily Housing, which you should probably get if you want to learn to invest in multifamily. He is Managing Director at Wellings Capital, a multifamily and self-storage investment firm, and hosts the How to Lose Money podcast. Paul was 2-time Finalist for MI Entrepreneur of the Year, has flipped 60 homes and 30 waterfront lots, developed a subdivision, and appeared on HGTV. Paul’s firm invests heavily to fight human trafficking and rescue its victims.

32 Comments

  1. I have long said that “money is only a tool” I unlike you drove into the local parking lot with the worst looking PU truck there, my thought, everyone else must be doing better than me since they all drive nicer vehicles than me! but why pray tell are they lining 5 deep to save 3 cents on a gallon of gas. I see a 60k SUV sitting there waiting 15 minutes to save maybe a buck on gas?

  2. Ali Hashemi

    WRONG.

    I’m going to come off sounding bitter only because this article felt like click bait. You made me read too far to finally get to the point.

    If Wealth = Assets That Produce Income then what is an asset that doesn’t produce ENOUGH income to cover it’s debt liability?

    There must be a lot of wealthy bankrupt people out there.

    Wealth is not “cash flow” as you claim. Wealth is POSITVE cash flow. Then I might be able to get on board with your prolonged explanation

    • Josh Garner

      Lets give him the benefit of the doubt Ali, and assume that cash flow means positive cash flow. Thanks for the great article Paul Moore! I agree and am active in trying to move from SFR’s to multifamily, with the goal of moving in to larger multifamily properties.

      • Ali Hashemi

        Normally I would err on the side of benefit of the doubt, however if an article is going to argue the semantics of the word ‘wealth’ then I’m going to be critical of how they define it. My post was over dramatic for effect.

    • John Murray

      Ali you are not an entrepreneur, you are a worker bee that has to change your paradigm. It’s not about cash flow, not about money it’s about freedom. You dream your plans, start to plan your dreams. Become skilled, become a freedom seeker and most of all become the person that leads the way off the cliff. Learn to use the tax system as a ally, not an enemy. Dump your thoughts of money as the reason for living, freedom is the only focus of the true entrepreneur. Money is the windfall of living completely free and securing your future as a lover of freedom.

      • Ali Hashemi

        !!! Boy am I going to make you and @LucasMills WEALTHY !!!

        I’m going to sell you a property at 3x it’s value with the guarantee that it will produce income! According to your very sharp powers of observation, you’re going to be enormously wealthy because of this magic formula:

        Wealth = Assets That Produce Income

        Deal?

        And if generating income is all you seek to be wealthy I’m willing to sell you as many income producing assets as you can buy! I will LOVE making you “wealthy” 🙂

    • Paul Moore

      Hi Ali,

      Thanks for taking the time to read that far into my post. I’m really honored that you took the time to do that, and I sincerely hope you saw some benefit in the article.

      I should probably have said “Free Cash Flow” in there somewhere, to refer to income above debt service. Thanks.

  3. John C.

    Thanks again for another inspiring post.

    I love your philosophy of giving back and being able to do something positive for the world.

    While I may not totally agree that apartment buildings are the greatest thing since sliced bread,(yet,) I’m convinced that they are one of the most awesome ways of generating wealth ever.

    And I totally get that true wealth is being able to passively generate more income than you can use, forever. However, new readers should be aware that you do have something to sell. So, as with advice from most experts here, take it with a grain of salt. But perhaps just a tiny grain.

    Again, another great inspiring article. Thanks, Paul.

  4. Mike Rosso

    Great article Paul. Totally agree with the part about investors being on “the treadmill.” I think a lot of people are in this situation non-investors included. The trying to keep up with the Jones’s has been taken to a new level and it’s almost as if everyone forgot about 07-08 crash. I see so many people living above their means, living in houses they can’t afford and car payments the size of an average mortgage payment. Thanks for sharing!

    • Paul Moore

      Thanks Mike. You know it’s funny… I thought the 08 crash would have changed people’s behavior forever. But it didn’t, did it. The evidence is all around.

      Well, I am sure it changed many actually, but certainly not all.

  5. John Murray

    I like articles that point to the truth. I’m a true entrepreneur that knows how to make effective decisions based upon low tax burden, multiple income streams (NOT EARNED INCOME!) and very hard work. The middle class faults are luxuries, spending money on scholarly achievement and keeping up appearances. What separates the multimillionaire entrepreneur class from the rat race is high intelligence (pragmatic), high energy, high self esteem, high work ethic and high risk taking. We jump off the cliff and build a hang glider on the way down and catch a thermal to fly to new heights. We are born leaders, work hard and most of all value freedom over money. Money is the product not the sum of our efforts. Employees think it is all about money, entrepreneurs know its all about freedom.

  6. James Dyas

    Paul
    Great article. I’m a remodeling contracting and whose trying to enter in investing in multifamily. How did you get started..? I have a good foundational knowledge of the business , but know have a real strategy to bring it to fruition. Can you assist me in a plan to follow..?
    Any help will be greatly appreciated
    Jay

    • Paul Moore

      Hi James,

      I helped build and manage a multifamily asset in ND before we had any idea what we were doing. Then, when I decided to make a career out of it, I read a little, then immediately hired a mentor. I highly recommend that you take that route. Many great ones out there (I could recommend a few if you message or email me).

  7. Jason Hinton

    I was curious when this article was going to get to the normal BP “real estate is the only way to build wealth” thesis. Real estate can also lose value and even become worthless, just like a stock. Just ask anyone that lives in a former boom town. In my hometown the city is begging for federal money to knock down houses that the owners have abandoned and can’t sell the cleared lots for $150.

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