How the rich make their money

A recent 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., 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%
• Interest – 6.6%
• Dividends – 13%
• Partnerships and corporations – 19.9%
• Capital gains – 45.8%

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

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 home owners

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 cashflow?

The simple answer to both questions is NO!

Cashflow 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 Four 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 Four Stranded Strategic Approach.

1. I buy a property 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.

4. And a property where I can “manufacture capital growth” through refurbishment, renovations or redevelopment.

By following my Four 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.

Michael Yardney is the director of Metropole Property Investment Strategists, a best-selling author and one of Australia’s leading experts in wealth creation through property. For more information about Michael, visit www.metropole.com.au or read his Property Investment Update blog.