Investing for wealth building

Real Estate Investing
Real estate is perhaps one of the most well-known wealth-creating assets. Historically, real estate has proven to be a high-yielding investment for those who know what they are doing. According to a 2017 study, the average rate of return for real estate over a roughly 150-year period was around eight percent. The next closest performing asset was stocks, with an average rate of return around seven percent. Other wealth building assets, like bonds and CDs, averaged below three percent.
Real estate’s high performance results from several factors, ranging from the potential for monthly cash flow through rental income to the significant number of tax breaks available to investors. For those interested in getting started, generating wealth through real estate will require choosing the right exit strategy and property type.
Start by researching your desired market and determine which areas have the most opportunity. Some options include residential real estate, commercial properties, and vacant land. While residential real estate involves strategies like renting out vacation homes or reinvesting returns, be sure to read this article.
Private Notes Secured by Real Estate
Real estate notes refer to promissory notes that guarantee to repay a mortgage or loan. They are an alternative to investing directly in real estate and instead award investors the chance to act as a lender. Private notes are an attractive vehicle for building wealth through real estate because they allow investors to take on a more passive role. This strategy does require a bit of background knowledge to be successful. Therefore, investors should be sure to do their research before getting started.
There are a few basic private notes to be aware of, including loans for investors who rehab properties, seller-financed notes, and loans for homeowners. Loans for fix-and-flip properties typically pay high interest rates and are short-term, ranging from six to 12 months on average. Notes for seller-financed properties can be profitable if lenders know what to expect. Before looking into this opportunity, be sure to familiarize yourself with seller financing. Finally, investors can act as a lender for regular homeowners. This setup is relatively straightforward and involves acting as a lender for aspiring homeowners.
When working with private notes, investors must have a screening system for borrowers. Be sure to look at the loan-to-value (LTV) ratio and a borrower’s debt-to-income ratio. Private notes can be a strong investment when managed correctly; however, it is good for investors to understand the system before getting involved fully.
Stocks of Publicly Traded Companies
Publicly traded stocks are another well-known example of wealth assets. Stocks award investors the opportunity to buy shares in companies and earn profits. Stocks have proven to be a strong wealth building asset over time. As previously mentioned, according to a 2017 study, stocks were found to be a highly successful investment with the rate of return averaging around seven percent. Many investors find stocks to be a successful investment over time, though they can be unpredictable in the short term.
Compared to other wealth-building assets, many investors will find that publicly traded stocks can represent an opportunity to diversify. Entrepreneurs who find success with other investment strategies can use stocks as a way to grow their profit margins.
Retirement Accounts
Retirement accounts, particularly 401(k) and Roth IRA accounts, can be excellent wealth-building assets. But, there is a catch involved: you cannot access the funds until you reach retirement age. While these options will not boost your regular income now, they can provide you with a financially stable future.
A 401(k) is a contributory retirement account offered through workplaces to employees. Some employers will even match contributions up to a certain amount, essentially providing employees with free money for the future. Contributions are tax-deferred until you withdraw, and can build up substantially over time.
A Roth IRA is another retirement option, but you can set one up independently from an employer. The contribution limit is currently $6,000 for filers under 50, or $7,000 for filers 50 and above. Again, the funds cannot be accessed until retirement age but this is a great way to build your wealth over time. Retirement accounts may not be as interesting compared to real estate or stocks, but these are crucial assets in terms of planning for the future.
Assets to Avoid for Wealth Building
There are numerous investment types available that can build wealth. While no one can tell you exactly how to craft your portfolio, some general guidelines can help you learn what to avoid.
Depreciation
The worst assets for wealth building include anything that loses value over time, called depreciation. For example, buying cars and boats may seem like a fun or interesting opportunity as you grow your wealth. However, when you factor in maintenance and general usage costs, you will likely lose money when selling these assets. There are a few exceptions for vintage or rare cars but for the most part, these are not recommended for wealth building.
Liquidity
Another important factor to look out for when selecting assets for your portfolio is liquidity. This refers to how quickly an investment can be sold. When it comes to collectible assets, such as wine or stamps, it can be hard to identify a buyer when you are ready to sell. This can result in lower than expected offers or longer investment timelines than you were hoping for. That being said, some investors will get heavily involved in these industries, which can help them turn quite a profit on these assets. Consider depreciation and liquidity as you craft your ideal wealth building portfolio to avoid losing any potential profits.
Summary
The answer to “what is wealth building” is important for anyone looking to supplement their existing income. By creating a wealth building system, entrepreneurs can establish a successful investment portfolio and achieve financial freedom. Choosing the right wealth building assets comes down to which opportunities best suit your financial goals. With the right planning, aspiring investors can be well on their way to generating wealth through real estate and other assets.