Most of us want to build wealth.
We may not be on that path yet, other than our jobs providing a salary and access to a 401K. But we want to, and we know we want to build wealth over time.
The U.S. added 675,000 new millionaires to our population between 2018-2019, according to Forbes https://www.forbes.com/sites/jackkelly/2019/10/22/the-number-of-millionaires-has-boomedheres-where-your-net-worth-ranks-compared-to-others/?sh=33fdedcc576f. And while you may not be at that cusp just yet, there is always a starting point.
I want to look at the one starting point that is most often overlooked, as a way to build real wealth.
Oh, and one note: this article digs into passive income wealth-building. Side hustles and other active income-building strategies are topics for another day…and other articles.
Passive wealth: Key to investing
Many a wealthy person has begun with little wealth; just a job and the income that brought in.
Most used part of that income to save, build up a nest egg of sorts, and invest that into something that then helped build their wealth more quickly.
A set portion of that earned income went to buying assets. Assets that then brought in passive income. That, in turn, becomes spendable.
Some buy apartment buildings, or self-storage units, or fast-food franchises, or professional NBA teams…
But they all start somewhere. They all use some of that savings to invest in some other asset that spins off more income or builds equity over time.
When you are just starting out, that can seem like an elusive goal that will take years or multiples of your income to get to. I get it. Many investments take a long time to come up with the money to be able to invest in.
The exception, to a point, is your own home.
Luis is a friend, who bought his home with 3% of the purchase price as a down payment about 3 years ago. He has been looking around for an investment property and found a really interesting deal. Wanting to put 25% of the purchase price as a down payment, we looked and he has that amount and more inequity in his home.
So, a simple cash out refinances, and he is able to use the built-up equity in his home to purchase the property.
Now he is expanding the portfolio of property that he owns, little by little, and adding both cash flow with rents on the new property, and the paying down of the principal balance and the appreciation over time as well.
The original home, where he lays his head each night after a hard days’ work, is the foundation of that expanded wealth-building.
Is it time to see about building your first passive investment wealth investment? Is it time to buy your home?
Goals with Passive Wealth Building
Building wealth passively is not the same as building another income stream. This form of wealth building is all about the appreciation and principal build-up over time, which does contribute in a real way to wealth.
Certainly, they can overlap. If you buy a duplex and live on one side while renting the other side, that can provide some income while building wealth.
For most homeowners, that is not the case. The home builds wealth over time, but provides no active cash flow. And that wealth becomes real and grows, little by little.
The net worth grows by owning a home. Passive income does not; that is a topic for another day and another effort to create and sustain.
For example, let’s take a renter paying $1500/month rent, and about $40/month in renter’s insurance, and take a look at a $9,000 down payment, or 3% of the purchase price, on a $300K home.
The payment, including taxes and insurance, and PMI, is a little larger than the $1500 in rent; but an average of about $500 a month is going to principal…in other words, it is paying down the mortgage.
It does not seem like much, sure. But it is amazing how that adds up over time to some really large numbers.
Now let’s assume that rent does not stay stable, but rises overtime at a rate of 3% per year. Take a look over 5 years at the difference:
Rents would total over $98,000 paid out over those 5 years; while owning would accumulate a bit over $32,000 in equity by paying the principal down.
That is quite a contrast and goes a long way to building that wealth.
Just by owning the home where you lay your head down after a hard day at work, every day.
The Ultimate Build Wealth While You Sleep Strategy
The elusive wealth-building strategies of the ‘gurus’ of building wealth are the ‘make money while you sleep’ strategies.
I am not knocking these…at least some of them. But they do require either money or time to implement. You can buy dividend-paying stocks…if you have money. Or you can start a business on Etsy…if you have time.
Once invested, your stocks will pay dividends without your active involvement. Great. And once your store is up and running, and products produced, you can get orders and make money while you sleep. Great. Both require an upfront investment of either time or money.
But, let’s face it. You have to sleep somewhere.
You can either sleep in a rented apartment or a home that you bought.
The former builds wealth for a landlord. The latter builds wealth for you – you are paying into the principal a little at a time every month, and over time it is appreciating, that is, going up in value – rather quickly now, much more slowly in a ‘normal’ market.
So, my point is, you have to sleep somewhere. Why not build wealth while you are sleeping, by owning the asset, the home.
You will sleep more soundly, I suspect.
Building wealth by investing in passive wealth-building assets can seem daunting, a real uphill battle when you are just starting out. Stories abound of those who plunked down $200 or $300 or $500K on an investment.
How will you get there?
One investment at a time…and the simplest and first is right where you sleep, every night.