How the Rich Make their Money

Last year an article in BRW explained that if you think the wealthy make their money slaving over a desk like ordinary folk you’ll never be rich.

They cited Inc.com who combed through the US Internal Revenue Service’s latest annual report into big earners and broke down how they earned their keep, which was as follows:

  • Wages and salaries – 8.6 per cent
  • Interest – 6.6 per cent
  • Dividends – 13 per cent
  • Partnerships and corporations – 19.9 per cent
  • Capital gains – 45.8 per cent

The clear message from this appears to be, if you want to get rich invest for capital growth.

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Now if you’ve been following my blogs you’ll know that this is what I’ve been saying for years.

I’ve always recommended buying well located residential properties and building a substantial asset base that will one day replace your personal exertion incomes.

If you think about it, as you build an extensive property portfolio, over the years the vast majority of your profit will be capital growth and not rents.

It’s really the same for homeowners.

If you bought your house 10 years ago for $250,000 and it’s worth half a million dollars today, the bulk of your wealth is not from your savings and paying off your mortgage but from capital growth.

What about in the future when capital growth will be lower?

There’s no doubt that over the next few years we’ll experience a lower overall rate of capital growth in property values.

Does that mean that property investment doesn’t make sense at the moment, or that you should invest for cash flow?

The simple answer to both questions is NO!

 

Cash flow is necessary to keep you in the property markets, but it’s really capital growth that will make you wealthy.

And while overall the markets are flat, there are still pockets of strong capital growth. It’s a bit like me putting one hand in a bucket of ice water and the other in a bucket of hot water and saying: “overall the temperature is comfortable.”

In all of our capital cities there are some areas where demand is outstripping supply, pushing up prices.

My 4 stranded strategic approach to property investing.

While at any time there are hundreds of thousands of properties for sale, not all will make good investments. In fact most won’t.

To ensure I buy a property that will outperform the market averages I use a 4 Stranded Strategic Approach.

1. I buy a property that will be in continuous strong demand by owner occupiers below its intrinsic value.
2. In an area that has a long history of strong capital growth
3. I look for a property with a twist – something unique or special or different or scarce about the it.
4. And a property where I can “manufacture capital growth” through refurbishment renovations or redevelopment.

By following my 4 Stranded Strategic Approach I minimise my risks and maximise my upside as each strand represents a way of making money from property and combining all four is a powerful way of putting the odds in my favour.

If one strand lets me down, I have two or three others supporting my property’s performance.

If you want to gain a degree of financial freedom, I suggest you consider investing for capital growth too.

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About

Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au


'How the Rich Make their Money' have 4 comments

  1. Avatar for Property Update

    April 24, 2013 Investment Startegies

    Excellent piece of writing. Many thanks for posting that. I was not knowledgeable of your weblog, however will certainly come again much more frequently at this point. Including you to my personal favorites.

    Reply

  2. Avatar for Property Update

    March 26, 2013 Lee

    Hi guys,
    Any tips for where to find the data for long term capital growth trends of suburbs? All the places I normally look have a 10year Average but that’s about it.
    Thanks

    Reply

    • Avatar for Property Update

      March 26, 2013 Michael Yardney

      RPData and the REIA sell data going back to the 1980’s
      But as the nature of a suburb changes, it’s hard to compare like with like and median price growth is difficult to interpret

      Reply

  3. Avatar for Property Update

    March 26, 2013 Dean

    Nice summary of what is required to make money in this property market. Buy a scarce property for a good price, in a good location, with high returns to enable long-term holding to make that capital gain.
    ‘The longer you hold the luckier you get’.

    Reply


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