Rich or Wealthy?
Do you make a distinction between being rich and being wealthy? Most people probably don’t, but if you’re going to invest in real estate (or anything for that matter), I think it’s important that you consider the differences and decide which is your goal.
That said, how do I define the difference between being “rich” and being “wealthy”?
Being rich is a function of how much capital (cash) you have. Someone who is rich — in theory — has enough money that he can do whatever he wants to do today. Perhaps he has a job (or a business), but he also has enough money that if he wanted to take some time off (or quit), he has that option. Someone who is rich is can choose to fly to Paris on-a-whim for a weekend getaway, or can buy a new car without thinking twice. The rich guy has the ability to do today what many non-rich people don’t have the option to do, because the non-rich don’t have the money to afford it.
On the other hand, wealth is not just a function of having capital. It is a function of having capital plus having an ongoing income stream to ensure that capital needs are met far into the future. A wealthy person not only can fly to Paris tonight for a weekend getaway, but could stay there for the next 20 years without having to be concerned about running out of money in the meantime. A wealthy person can quit her job this year, and not have to worry about how she’s going to pay for that new car 10 years from now. The wealthy person has the ability to do what many non-wealthy people don’t have the option to do (even what most rich people don’t have the option to do), because the non-wealthy don’t have the income stream to afford it.
While the rich have enough money to do whatever they want today, the wealthy have enough money to do whatever they want forever. And that’s an important distinction. Many non-rich people admire the rich, thinking, “That’s my goal!” What they don’t realize is that the rich are looking at the wealthy thinking, “That’s MY goal!”
So, you’re probably wondering, what does this have to do with real estate?
As I discussed in a previous post, there are many (hundreds!) of different real estate investment paths and investment vehicles. Some will put you on the path to riches. Others will put on you the path to wealth.
For example, a great mortgage broker, a good real estate agent, or a good house flipper (come on, you’ve watched those shows!) can certainly earn enough money to get rich. The best of them can easily earn $1M a year or more. But what happens when they stop working? They stop making that money. And pretty soon, most of them need to stop living the lifestyle that having that money affords them.
But, what about the guy who owns 200 rental units, with each of those units being managed by someone else, and each generating $100 per month. He’s making $20,000/month, and if he stops working tomorrow, he’ll still be making $20,000/month! And next week (next month, next year, ten years from now), he’ll still be making at least $20,000/month. That person is on the path to wealth.
There are many real estate vehicles that will put you on the path to riches. There are many real estate vehicles that will put you on the path to wealth. It’s important to know the difference; it’s also important to know what your goals are…only then can you choose the right vehicles. In real estate, just like any other investing activity, you need to ask yourself, “What is the goal?” And, “Will this investment get me to where I want to be in the long-run?”
For those that want wealth, sometimes it’s necessary to follow the “get rich first, get wealthy second” plan. And sometimes it’s possible to following the “get wealthy first” plan. There’s no right or wrong way to do it (it all depends on your situation and your motivations). The key is to ensure that you know what you want, and create a plan to get there.
By the way, most wealthy people start by getting rich — by selling/flipping houses, having a high-paying professional job (doctor/lawyer), running a business, etc. They make a lot of short-term cash, giving them the option to do whatever they want at that time. But, instead of just spending that cash (with the plan of just going back to work year after year), they instead decide to leverage the capital they have to help them get wealthy. They leverage that money to create investment income streams that will generate more money far into the future, and long after they stop working.
If you’re happy just being rich, that’s great. But, if you want wealth, you need to plan for it. Whether it’s real estate or any other type of investing, you need to ensure you have a plan that fits that goal.
Great article. I am a 36 year old corporate executive. I made a lot of money over th past two years, but my employer is having cash problems. I just got a nice severance package and I am now looking for the opportunity to start a business for myself that will add real value to the long term
I too liked the article. I am a 46 yo scientist that decided that the politics was killing me. I do not have enough capital to day trade and live and “get rich” but I do have the credit and equity needed to try my luck at providing afforadable rental housing with the occassional flip from time to time. At least that was the plan I came up with this weekend. THis article just really brought it all together. Thanks a bunch. I am off to further my education…..
I have been reading a lot of Real Estate for couple of years and it looks like I am still not fully equipped with the knowledge to do deals. Your article is great and encouraging. I like to wholesale and flip but anytime I make an offer because I am always scared to death my offers are too low and the experience investors take the deals. So your article has just pushed me to ask if you can mentor or coach me.I have hope that the first couple of deals will give me more power to go ahead..
Lawrence –
Start by reading everything on my blog and everything you can get your hands on. Feel free to ask questions along the way. I have a feeling that by the time you finish a couple hundred hours of reading and putting together a business plan of your own, you will find that you don’t really need a personal mentor at this stage.
I’m fairly new to your blog and I have to agree with the above statement. After reading it I realize that I may not necessarily need a mentor (although I thought about asking you as well). You have really laid out a real blueprint here. Years ago I read the Kiyosaki, book Rich Dad Poor Dad, and bought my first duplex but I didn’t have a plan. Years later I renovated the property and sold for a profit, however I believe that success is 90% planning. You still have to act on that plan.
BTW, Rich Dad Poor Dad does not give you a plan it more so inspires you to want to build wealth; the rest is up to you.
Thank you so much!
I discovered your site last night after months of searching out the right real estate path to take my newly laid of 54 yr old self toward. This article articulates the path a want to take.
I will do exactly what you told Lawrence: read everthing on your blog and make a good business plan before I go buy my first flip-house. You’ve inspired me to actually believe I can build true wealth in this business.
Very well said, but you might not want to plagiarize Tony Robbins basically word for word. His example about rich vs. wealthy even talks about flying to Paris if you’re rich and being able to live there for 20 years if you’re wealthy. Of course, Tony could have gotten it from someone else I suppose.
love the site either way
Hey T.R. Fan –
I’ve never listened to (nor read) Tony Robbins, but I’ve heard/read that analogy dozens of times in my life, so my guess is that it’s probably an often repeated saying, whether it came from Tony or someone else. If I really said it word-for-word as he did, it’s just a coincidence, I promise…
since last year I started buying foreclosure properties for rental income till now I’ve procured four properties without any mortgage loan and getting CAP return of 18-21% per year. Now I am planning to buy properties for flipping with my own cash reserve of about $60000/- this article and your other guidelines have given me lot of knowledge any further guidelines???
Very good article and definitely something to think about. We canot work forever so we must plan for that. I was thinking of ways to be rich but not be wealthy. Your article changed ny thinking.
Very well said. I’ve been reading through all of your old posts and I keep being reminded of this one. I read that you had initially planned on beginning to invest in multifamily properties, which is the direction I am currently pursuing. 5 years later, how do you see the your SFH fix-and-flip business model fitting in with the long term goal of becoming wealthy not rich?
Thanks for taking the time to contribute this site to the rest of us!
Hey Cooper,
SFHs have helped us generate decent income over the past few years, but it’s certainly not a path to wealth. That said, we’re starting to move back towards our original goal of focusing on multi-family properties over the next 6-12 months…stay tuned… 🙂
J,
I have spoken to few real estate agents in the Atlanta area and they mentioned that duplexes, triplexes and quads tend to have more credit challenged clients than SFH. So it translates to more risks. What are you thoughts?
Thanks!
Hey Brian,
I definitely agree with that. Most SFH landlords tend to be a little more picky about their houses/tenants than property managers tend to be about theirs. It may be that multi-unit properties tend to have professional management whereas SFH tend to have owner management, and owners obviously are going to be more diligent than a typical PM. Also, multis tend to be lower-priced than similar sized houses, so you tend to have a different level of tenant.
Thanks J. It seems like you are approaching the multi-family route. Why not keep acquiring SFH, which is what you do best, and rent them out? Maybe you want to move to apartment buildings?
Thanks.
Hey Brian,
I don’t really want to be landlord. When we start going the multi-family route, it will be to flip apartment buildings. Buying and selling is in my blood…holding and dealing with tenants is not… 🙂
Just wanted to say I’m a new reader to your website & blog and I am really enjoying the read so far. I’m a manager at a nice apartment community now and throwing some ideas around of how to invest and earn a nice profit, maybe gear up for a solid career change in this field. Thank you J Scott and all readers who are offering their questions and opinions. This is a great source of information.
J, you’re so generous with your knowledge. Special thanks from a newbie. (You’re a F!@#ing GREAT writer, too…not sure if you get acknowledged for that).
Hi J!! Thanks for your info and this website I am completely new to the real estate game but myself and two of my really close friends want to all put up some cash and buy a flip. Do you think it’s a good idea for 3 newbies? Btw I bought your book ” the book on flipping houses ” very informative so far, I’m working on my business plan with the help of that book.