It’s a commonly held belief that wealthy people fund their extravagant lifestyles from their personal coffers. However, the reality couldn’t be further from that belief.
There are two incontrovertible truths about the wealthy:
- They value assets over income
- They don’t spend their wealth, but instead accumulate
The following post outlines how real estate keeps wealthy people wealthy. It also explains how average people can be successful with this strategy.
wealthy people Borrow To fund Their lifestyles
At the surface level, you would notice that the average affluent person’s life involves fancy vacations, expensive toys, and mega mansions. By looking closer, you would notice that this lifestyle is primarily funded by debt.
A large portion of the population has access to financing. What differentiates wealthy people from others is that they utilise this financing at a highly efficient rate. Most people consider financing to be a means to an end. However, wealthy people consider financing to be equivalent to free cash flow.
Real estate Is Some of The Best Collateral Around
The average wealthy person has amassed assets over his or her life. These are appreciating items that generate value way above the time and effort spent to acquire them. Certain assets, such as real estate, can experience significant appreciation over a relatively short time period.
Now if you wish to realise a gain on your asset, you would sell it. However, past that point, you will never receive any additional upside (or downside) to that asset. Wealthy people don’t sell their assets. Instead, they go to a bank and open a line of credit against the equity of their property. This is commonly known as a HELOC.
This financing can then be used to fund their lifestyle, or even used to further grow their investments. Moreover, provided the investment rate of return exceeds the cost of maintaining the HELOC, they will be making money for practically nothing. They can do all of this while not jeopardising their initial portfolio.
Can The Average person Adopt this Strategy?
The short answer is yes. However, you’ll need assets to post as collateral. Owning your home is a great first step to obtaining this additional line of credit.
I believe there are a few reasons why most people don’t embrace this strategy. The obvious one is that there is considerable downside. You will still need to cover the line of credit even if you lose your home. This is understandably too great a risk for most people.
Perhaps another reason is a lack of awareness that such a strategy is attainable. I’ve come across several people who work extremely hard to own their home, and even build a property portfolio over time. Then their growth journey slows down. If they were to utilise additional borrowings against their properties, they may potentially recognise growth way beyond that of their portfolio.
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While you may never attain the same level of wealth as the super affluent, you can still adopt some of their strategies. However, great reward is not absent risk, and that is something you must be willing to accept.
The content outlined above was written, edited and published by the Lost Realtor. The author has over 20 years or real estate sales and investing experience in the Australian property market. He has held senior positions in Australian building companies, including being the General Manager of the residential sales division of Collier Homes. His qualifications include a Bachelor of Commerce degree and a Graduate Diploma in Building and Construction Law.