How Best To Grow Wealth

Today, I want to touch on a topic that I assume all of my readers are interested in — how best to grow wealth.

I’ve chosen real estate investing as a vehicle for wealth creation, but I’ve never really taken the time to explain why I’ve chosen real estate investing and why I believe it is (one of the) great ways of achieving financial freedom. Hopefully, this article will explain why I like real estate investing so much, and why I believe that real estate is a great wealth creator for everyone.

I imagine many of you have read articles (like this one) that talks all about how saving money and investing it wisely over a long period of time can generate large sums of cash. The conventional wisdom is that, if you start saving early enough in your life, you contribute periodically to that savings and you invest that savings into a safe, diversified portfolio (stocks, bonds, CDs, etc), you can retire at 65 very comfortably.

Not only does it sound great in theory, but if you do it right (start early, continually contribute, invest in a diversified portfolio), it really works! In 40 years, you can have a tremendous amount of money saved for retirement. There is a major downside to approaching wealth-building in this fashion: Time. In fact, time is a major downside in two ways:

  1. This style of wealth creation requires you to start at a very early age. If you don’t start early enough, you won’t have enough time for compound interest to work its magic and start to generate large sums of cash.
  2. This style of wealth creation requires decades to build the amount of wealth needed to attain financial freedom from a 9-5 job.

So, while saving, continually contributing and investing in diverse portfolio will certainly work for some people, it won’t work very well for those who aren’t young and/or those who don’t want to wait decades to attain financial freedom. Let’s take a look at an example that will demonstrate what I’m talking about.

Let’s look at three investors, aged 25, 35 and 45. All are saving for retirement. Each saves and invests $1,000 each each month and earns 8% annual returns on their investment — pretty typical of a diversified portfolio.

At age 65, the investor who started at age 25 will have over over $3,500,000. The investor who started at age 35 will have just over $1,500,000. The investor who waited until 45 to start investing will have under $600,000. Waiting 20 years to begin investing cost the investor nearly $3,000,000! In fact, only $240,000 of that would have come directly out of the investor’s pocket — over $2,650,000 of that is lost interest!

Starting just 10 years earlier can even make a significant difference. The investor who starts at the age of 35 will have two and a half times as much as the investor who starts at the age of 45. Clearly, the longer you invest/wait, the more money you have, but other than waiting, there is absolutely nothing you can do to influence the return on your investments. You have no control over how quickly you grow your money.

And again, for those who don’t have the time (are older) or don’t want to wait (looking for financial freedom sooner), this isn’t an optimal recipe for wealth creation.

But luckily for these two groups of folks, time doesn’t have to be the only factor when it comes to trying to achieve financial independence. When it comes to investing, there are actually two important variables that contribute to how much your money will grow. As we discussed, Time is the first. But the second is equally – if not more – important: Rate of Return.

Rate of Return

Again, if you read enough articles like the one above, you would think that the only rate of return you can get on your money is the 7-9% that you get from diversifying your money across lots of paper (stock market) assets. But, is it really the case that all your calculations should be based around the assumption that your investments will return 8%?

There are lots of investing strategies that return more or less than the much-quoted 7-9%. For example, savings accounts return around 1%, not enough to even keep up with inflation. Treasury Bills (T-Bills) and Certificates of Deposit (CDs) return about 3-4%. Obviously, those investments return less than typical stock market returns. Which is why many of us like to specialize our investing into a single niche area where our returns (and wealth accumulation) can be significantly higher?

How much higher? Let’s take a look…

What’s Does a Few % Really Mean

The difference between earning your 8% from a diversified portfolio and earning closer to 15-20% through real estate (rentals, flipping, lending, etc) is probably more than you realize. In fact, a couple percent compounded rate of return can make the difference between being able to retire in 40 years vs. being able to retire in 10 years. For a lot of older investors – and younger investors who don’t care for work – this is the key.

Let’s look at the difference in the growth of your money based on different returns…

Using the example situation above, let’s assume an investment amount of $1,000 per month. For a 25 year old who has 40 years to invest, remember that we can expect to earn about $3,500,000 by the time he turns 65 by investing into a diversified portfolio earning 8%. Now, what if that 25 year old were to receive 15% annual return compounded for the same 40 years…how much do you think he’d have? The answer is, more than $31,000,000! The difference between an 8% and a 15% return over 40 years was nearly thirty million dollars, or 10 times as much!

How about a 45 year-old that only had 20 years to save/invest? To have the same amount as the 25 year-old — who is earning the 8% from a diversified portfolio — when he turns 65, he’d need about a 20% return. If the 45 year-old can increase his investing return from 8% to 20%, he can cut the amount of time necessary to reach his retirement goal (or any financial goal) in half!

Here’s the main point — when you only consider the Time variable of investing, you miss a key element that defines your success as an investor. And that’s Rate of Return.

Why Real Estate?

So, now that you’re (hopefully) convinced that you’d much rather be making a higher rate of return than a lower one, let’s get back to the issue of how to make more than 7-9% on your money like you would with a diversified portfolio of stocks and bonds.

Is 15% achievable? How about 20%? More?

Yes, they’re all achievable. As a buy-and-hold investor, I’ve earned between 15-30% returns (leverage helps). As a rehabber/flipper, I’ve earned up to 45% returns on a relatively large portfolio in a single year. I know investors who have doubled their money (100% returns) in a single year. I even know plenty of part-time investors who can easily earn more than 15% returns on their investments without a tremendous amount of effort or time commitment.

It’s not easy. It requires focus, education, and experience; you must become an expert in your investment area. Sometimes it can take years. But that’s why the best investors are highly focused on one area of investing, as opposed to diversifying. They become great at what they do, and because they are so good at what they do, their returns far exceed the average, and far exceed what they would get if they were to just passively diversify their investments in stocks and bonds.

34 thoughts on “How Best To Grow Wealth”

  1. Great article! As you said, its not easy, hard thing to do, needs focus, education and experience to become expert in the investemnt area.

  2. Very interesting talk here! Its great to hear peoples reasons for getting into real estate – and to have a good breakdown of what one needs to truly build wealth. Thanks for sharing your insight!

  3. Interesting article, however there is more to it. Often investors dont think about alternative losses – losses they suffer by focusing on the wrong area in the first place. Sometimes investors loose 15% or more because of poor location choise.
    Weve done an extensive real estate research on the matter and start publishing the results on our blog.

    1. The best place for investors to invest is in their own backyard (their area). Sure, you can probably find better areas, but trying to buy/invest in property far from home is likely to negate any additional profit (and more!) due to the complexity of buying/rehabbing/managing long distance.

  4. Great article. The issue I hear that stops people from getting into real estate is the initial investment, not to mention all the fear about the 2008 housing collapse.

  5. I have learn that real estate is the best way to build wealth. Buying just 20 home and getting them paid off can bring you in more cash flow than the average pension could.

  6. Thanks J! Great intro to real estate returns. It would be great to see a follow up article on your opinion of risk tolerance. I am sure you have a few strategies the hedge loss.

  7. Real Estate is really an amazing way to create financial freedom, but unfortunately, most of people dont know the way to make it

  8. Good article. You make a very good case for building wealth through real estate. As a real estate investor I have certainly found it to be a good investment overall. There are two additional things I would touch on. It is important for investors to keep abreast of the real estate market. An investor can easily lose their investment in a poor market. Also, home loans can play an important role in real estate. Understanding interest rates and obtaining favorable loans is important to real estate investors.

  9. “It’s not easy. It requires focus, education, and experience; you must become an expert in your investment area.” this is so true, in this kind of business, one must continuously educate himself about new trends.

  10. Great article and advice on getting the most out of your money. The real estate market is definitely a high return opportunity if done correctly.

  11. Thanks J! Great intro to real estate returns. It would be great to see a follow up article on your opinion of risk tolerance. some good investment….

  12. I love everything youve written either in books, blog or elsewhere. You have been so influential to so many people across the country. You gave me the motivation to contact a hard money lender and get my first deal rolling and Ive never looked back since. Thanks for doing what you do!!

  13. Great info! The thing with real estate is that you can start at any time (of course the earlier the better) unlike the stock market which needs time and consistent contributions.

  14. Hi J, I have just found your site as I am contemplating a career change into flipping. What a wealth of knowledge! I will definitely be getting your book. I am curious ( and maybe I havent found your post yet), wether looking at it as investment or income, how much cash do you need to start flipping? I know a lot depends cost of house, ect. But what is a minimum amount you recommend thaving to buy, rehab, pay mortgage, and any unforeseen issues (which will most likely happen)? Appreciate your advice. Thanks.

  15. I love your article. I agree that education, and experience is a must. With a wealth of experience we can handled some of the most complicated real estate transactions on the market today.

  16. I was investing in real estate in Tennessee and had my network in place. I was lucky to find a great realtor to work with on finding and selling properties. I now live in New York and am having problems finding a realtor willing to find bargain properties. I dont know if they are too busy now or just too lazy to put in the effort. Any suggestions.

  17. Good article. Real estate has been one of the surest ways to get rich since before there was money because everyone needs it. There are numerous paths to wealth in real estate, but it generally revolves around buying property that brings in more income than it costs to own, and holding on to that property until the prices go up.

  18. Many people are scared of the market after being burned a couple times. Real Estates provides another avenue for building wealth and diversification with multiple ways to accomplish it within the real estate niche.

  19. This is a good article and its good to see articles be expanded into some other investments other than real estate. Real estate is great, and I do agree with you that these can become bigger returns if someone would start later in their career verse younger in their career. I say that its investments into Roth IRA or IRA, 401K, Self Directed IRA, and Real estate in no specific order listed.

  20. Great article. I chose real estate as my avenue to wealth after reading Rich dad Poor dad. The return you get from it destroys any return I make on the stock market

  21. This is what I am trying to accomplish. Although Im afraid to lose my pants in the Miami housing market with all of the illegal additions I feel like there is a lot of luck that needs to happen to find the right house, get it before the million other investors place all cash offers, then work with the right contractors, there are so many crooks down here. Are the markets in the rest of the country as shark infested as they are down here?

  22. This article is on point. This is why Ive invested my money in creating an agency for real estate. True, it is one of the best ways to earn wealth.

  23. Great article!

    The information on Rate of Return is incredibly informative & useful, and it goes against what Ive heard from the more mainstream guys.

    Sticking with one investment area, as opposed to diversifying, is brilliant and seems to be the wisest choice in the field.

    Thanks for the information!

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