How do people amass large amounts of wealth?

[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?

[Jon Holdman]

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.