The "Millionaire's Next Door" in that book were working in an environment different than the current, that's a fact. Now whether the current environment is "less honest and merit-based" (as I happen to believe), or not, it is certainly different.
Bubbles come and go, some are long, some are short, some are consequential, some are not. For example, real estate bubbles: these are most dangerous because it is usually the most substantial asset purchase an individual ever makes, and it is typically 90% leverage. If you fall ass-backwards into the right spot on the development curve, you can literally turn $50k (down payment) into a million++ dollars - if you guess wrong, you're bankrupt and you pray that you have a non-recourse loan.
Ok - downpayment on a house of 50k, 90% LTV. Must be 500K. Doubles in price to $1mm. Let's say it does this in 10 years. Wages haven't appreciated much. Where does that 500k come from? The next generation.
Zero sum game. Rampant inequality. Crashing social mobility.
As you say it's not merit based. How many people can save 500k in 10 years? Leveraged mortgage debt then becomes the only game in town. Game set and match the banks.
1. Debt - someone pushes a few buttons on a computer keyboard and "poof", you've conjured a million dollars out of thin air
2. China - this is real money, but if it gets pointed at one geographical region, it can cause major distortions, especially if that real money can be confiscated at the whim of the politician who happens to be in power at the moment
No - we are seeing an increase in credit but not wages. Asset prices are running ahead of wealth creation so the young must pledge to work for longer for the same pile of bricks (and land).
Yes there is foreign money but still most buying is domestic. Foreign money is a convenient bogey man. It's the same in Canada and the stats do not bear it out.
I hear all the time about this time it's different. I heard it when I was young, too. In the early 80's, if you invested $1,000 in Boeing stock it'd be worth $60,000 today.
I.e. you don't have to live a Spartan lifestyle to have an investment program, nor do you have to be unusually lucky, or any of that. Just underspend your income by 10 or 20%, and invest the rest in ordinary, boring investments.
But I'm saying, that's not true in some places. There are many geographical regions (even countries) where median local wages cannot buy the median real estate - historic ratios are totally distorted.
But your description sounds like a home the buyer lives in. That is not an investment, from an investor's point of view.
Instead, for a specific example, consider a 4-plex my wife and I bought for $65K down ($215K total - it is in an economically depressed area). Rents, when fully occupied (not always the case, we see about a 5% vacancy rate) are $700 a month over all expenses, including debt service.
Plus, we put close to 20% down but get 100% of the depreciation. End of the year: $7000 in our pockets, a legal tax loss of $800. And that is assuming no change in value of the asset. If someone offers to buy us out at %200 of the purchase price I would definitely consider it, but until then, I pocket the proceeds.
For me, doing the due diligence up front reduced the luck factor, my preferred way of obtaining my goals, when possible.
Your math does not add up. If your rental profits are $700/month (total for all 4 units), then your annual rental profits should be $8,400. For a property purchased for a total of $215,000, the depreciation should only be approximately $7800/year (straight line, 27.5 year recovery period), meaning that you should have annual taxable rental income of roughly $600.
Moreover, the amount of depreciation you can take (in total) does not increase with a change in the value of the asset; it's based on your "cost basis" in the asset. It only goes up if your costs in the asset increase, such as for property taxes paid, improvements, etc.
Finally, and this is a big one--the value of the land is excluded from the depreciation calculation--only the building and improvements to the property can be depreciated. So $215,000 is an upper bound on the recoverable amount--the properly depreciable amount is less than that, meaning that your annual depreciation should actually be less than $7800/year and that you should actually have more than $600/year in net rental income.
You need to talk to an accountant soon, because if you get audited you almost certainly will be paying back taxes and penalties.
Sorry, I was rounding conservatively, and my tax returns were prepared by a conservative, professional firm that I hold in high regards, so I am not concerned there, but thanks.
To be more accurate, we do get a bit more, but we withhold for repairs, replacement costs, wear and tear, new appliances, etc. So our income is higher, but I have trained myself not to count it, as the odds tell me I am going to have to pay for repairs. The $700 is what we get to hold onto most often, unless we are saving towards big repairs like new roof, outside paint, etc. And (crucially) I left out that we had enough first year expenses to legitimately lower that perceived income, as well as the interest that we get to deduct (interest being far higher at first in a mortgage payment). Next tax year will have different numbers, since we will have had different expenses and different occupancy (unfortunately they do not stay 100% occupied).
I am just trying to get out round numbers that show that it can work.
Most people have this concept that their house is their biggest asset, when a residence is really a liability for the person who lives in it.
I should not have taken the shortcuts in my math, but regardless, we do well. We have used the profits to invest in more education, and have recently purchased another unit in Florida that will start cash flowing in about two more months. Well, actually it cash flows now, but we had to pay for some new appliances, so in my head, we are negative for two more months, then we start paying off ourselves for the down payment. Again, I am more conservative.
So it is a slow path to wealth, but a valid path, nonetheless.
And I should have put this in the first comment I made:
This is not legal advice, nor is it financial advice. Please seek professional guidance for specific situations. This only serves as an example of one specific deal I am involved in. And even I get the numbers slightly wrong sometimes - H/T to gamblor956 for reminding me to state this.
My point was, the simple advice "if you do this (prudent idea) then you can expect (this approximate outcome)" no longer holds. There used to be this idea that you could compare historic ratios (like a P/E ratio with companies for example) to determine relative value.
Now, in a lot (not all) geographical locations, all these historical indicators are useless. Asset values no longer have any relation to local economics, in various different ways. In the US in the housing bubble, it was loose credit. In Canada and Australia, this persists, because they somehow escaped the psychological popping of the housing bubble. And at least in Canada, there is the additional massive "unnatural" demand coming out of China:
I agree. That is why investing for capital gains, AKA flipping (buying low and selling higher) is more risk than I want. I pick deals where cash flows positively from day one. I have passed on several dozen deals and only purchased two so far. I have heard others say 100-20-5-1: Look at 100, put in bids on the best 20 (if they pencil out), maybe get 5 acceptances, choose 1. Those are averages, not direct experience, but it does encourage patience.
What sort of area are you buying in? Where I live you cannot buy any real estate of any type for $200k. Are you buying out of state or out of country? How do you manage the risk?
Del Norte County California has many houses for less than $250,000, but single family homes do not "pencil out" here - The rents will not pay for the expenses. Multi-family units can, and the more units, the more likely they will.
We also bought in Lee County Florida, where a single family home IS cash flowing. If the employment market stays stong, we will look at picking up more, assuming we find deals that are acceptable to us.
Risk: Insurance (property and landlord's liability), entity (LLC), and strong property management that is tight on screening prospective tenants. Last, watchful management: We keep an eye on the Property Managers, and provide overall management decisions, like where to keep rents, what improvements/repairs to make, etc.
We are new at this, only 5 years in, so we are still most definitely learning.
And I should have put this in the first comment I made:
This is not legal advice, nor is it financial advice. Please seek professional guidance for specific situations. This only serves as an example of specific deals I am involved in - H/T to gamblor956 for reminding me to state this.
I'm an investor myself. I have gone the route of industrial property. Still learning as well. Not much multi-family where I am, maybe a few duplexes but they still sell too high for the yield.
Happy land speculation. I thought Hacker News was full of actual entrepreneurs but it seems not, we have good old fashioned usurers and their foot-soldier landlords.
As we are just getting started, we look for at least 11%, and will move that higher as we get more experience (and more patience :)).
Property management in both locations is about 10% of Gross rents. One company also charges half of the first month's rent to cover turning, advertising costs.
I have friends who are long established investors. They won't buy unless there is an expected 20% return either in yield or flip. They are mostly retired now and don't buy much anymore.
I actually stole it. The original quote is 'everyone gets what they want from the financial markets'
Everyone can unpack the statement in different ways, but essentially your financial position is a result of how much effort you put into it. Most people put little effort into it, or even knowingly make bad mistakes like buying new cars on credit, yet shrug their shoulders and do it anyway.
In the short term you might have a setback but people with priorities for financial success are able to overcome these and go on to greater heights.
An evidenced in these comments there are some people who want to talk about how the deck is stacked against them and they can't possibly get ahead - yet people from all walks of life achieve financial freedom every day, so this is patently not true. The people who think this way are getting the outcome they want, which is to priories blaming over achievement.
That is a very dumb statement. I think it might even be a joke. In a zero sum game of housing speculation where there is no wealth creation of any kind then by definition if you win it's at the expense of someone else.
They are achieving financial freedom by stepping on the throats of their brothers and sisters. If you want to "achieve" financial freedom that way fine, but I'll rest easier on my (cheap) death bed rather than surrounded by trinkets bought after exploiting the poor and needy.
Your comment is so wrong it's hard to comprehend the mindset.
I think we're talking about several different things here. I'm asserting that there are five essential inputs to one's economic outcome. In no particular order, they are:
1. The activities in which one engages to obtain income. This can be labor, crime, cheating and manipulation, employment of capital, or some combination of these.
2. Starting position: did you enter adulthood with an inheritance or trust fund?
3. Management: what do you do with the income you receive?
4. Environment: macroeconomic conditions and public policy (presently inseparable).
5. Luck, those arbitrary events that affect an individual or small group of people (as distinct from environmental factors that affect everyone). These can be positive or negative.
Individuals generally can control (1) and (3), though the available options and their merits are products of external forces. You seem hung up on the notion that these are the only two factors that matter. You acknowledge (5) but assert that it's ultimately irrelevant to outcomes. You don't seem to acknowledge (2) and (4) at all.
I am asserting that a high probability of good economic outcomes (i.e., financial independence) requires that at least (3), (4), and (5) all be favorable if we begin from the premise that the only sources of income and capital available are the proceeds of labor and one's own accumulated capital. That is, we're not going to cheat or steal and we weren't born into anything.
I am not asserting that good economic outcomes are impossible under other circumstances, only that they are highly unlikely.
It would be very useful to bring some data into this conversation. I would like to compare the outcomes achieved by hypothetical pairs of individuals who satisfy our constraints on factors (1) and (2) and are identical in their luck (there are no material events) and management, but differ in environment. For example, suppose that there are two individuals born 20 years apart, one in 1955 and the other in 1975. Both are male Americans, both are employed in full-time, year-round work beginning at age 20, neither is ever unemployed for any reason, and both set aside some fraction of their age-appropriate median-wage income and invest it in one of a few simple ways (we can vary that fraction and how it's invested). Each pays the taxes he legally owes and no more, and for simplicity's sake each is single and lives in a state with no personal income tax. The object of this exercise? To check in with each at age 40 and see, in today's dollars, the purchasing power of their assets and the purchasing power of the income those assets produce. We could then examine other splits; for example, two people born at the same time, one in Japan and the other in Switzerland. Or fraternal twins, one male and the other female. The possibilities are limited only by the availability of data.
It would be great to see such a study. If anyone has done it, the results are not particularly easy to find. Most of the data exists: historical tax laws from the Tax Policy Center, historical income data from the Census Bureau, deflators and unemployment data from the BLS, interest rate and bond market data from the Fed, and stock market prices and dividends from the exchanges and many other sources. Some countries keep better records than others. Having looked into what's available, I think someone could put together something reasonable in a week or two.
According to your thesis, these studies will show that everyone will obtain approximately the same outcome, because in all cases we have controlled for luck, starting position, income, and management strategy. Only the choice of management strategy will have material impact.
According to my thesis, these studies will reveal (a) that environmental factors dominate the outcomes, (b) that there are many environments in which there is no non-oracular management strategy that will yield an outcome as good as that achieved by a male American born in 1955 who employs a simple, moderately frugal management strategy, and (c) that the vast majority of environments that have existed over the past 20 years, including today's, are strongly detrimental to positive outcomes.
I assert this despite the ultra-simplified deterministic model I propose to use. I further assert that the stochastic injection of periods of unemployment (in accordance with actual historical rates) will radically worsen outcomes in at least 3 quintiles relative to the above-mentioned baseline.
Finally, I assert that these results are obvious. I'm not exactly going out on a limb here.
I know I sound like a "progressive". I am not. I do not advocate redistribution, higher minimum wages, more rent control, or a culture of victimhood. Quite the opposite on all counts. What I do advocate are changes to public policy that make it much less likely that decades of any individual's working life will be lived in an environment that strongly penalizes the proceeds of labor and accumulated capital. You should not attack me based on your preconceived ideas about "what I want", from either the markets or public policy.
More directly to the point, my original assertion was that teaching a child that factor (3) is the only one of import does him a great disservice. Prudent management of one's finances is almost always necessary but almost never sufficient. Acknowledging this is not casting blame but rather observing the world around us, thinking critically about how it works, and accepting it as it really is: healthy things for any child to do from an early age.
> teaching a child that factor (3) is the only one of import does him a great disservice.
I've seen a lot in my life with this, and it's wildly untrue. I know many families with multiple children, and over time some of those became millionaires and others did not. None I know started with inheritances. I know a lot of self-made millionaires. All of them share a common attitude that their future is in their own hands, and it's clear from the arc of their financial lives that that is true. Their choices produced their outcomes.
The ones who did not become millionaires also share a common attitude that nothing they could have done differently would have changed anything.
The fatalistic outlook you have will be self-fulfilling. But you can choose to change it. It really is up to you. The choices you make matter. If you want to know more, I can't recommend a better book than "The Millionaire Next Door" about how ordinary people doing ordinary things become wealthy.
I've read it. I think if I were born in 1950 it would be worth its weight in gold. Someday someone will write a similar book that would have worked perfectly for people who were born in 1980; unfortunately, by then it will be too late for us and instead the next generation will debate its (in)applicability to their lives.
It's not fatalistic. As I've been saying all along, you have some control of some things. Exercising that control constructively is necessary. It simply is not sufficient.
Take a look at the stock market returns for the last 5, 10, 20 years. At pretty much any point you could have invested and had handsome returns by today.
I also know people who abandoned the market at the bottom of one of the various dips. They're all bitter about the recoveries since. Taking a longer view, the various machinations of the market that seemed so important at the time are lost in the width of the line on the graph.
Yes, your choices are by far the #1 factor in any success, or lack of, that you have. Telling your children anything less is a disservice.
"According to your thesis, these studies will show that everyone will obtain approximately the same outcome, because in all cases we have controlled for luck, starting position, income, and management strategy. Only the choice of management strategy will have material impact."
No, you haven't understood my thesis at all. You seem to think I'm making some sort of political or statement related to the current economy.
The point us that every gets out a combination of what effort they put in and the decisions they make. For some, born with a trust fund, those efforts bad decisions are easy. For others, new immigrants without qualifications, those efforts are going to need to be huge.
For all, they will get back what they put in. All will get what they want, when you read want as not what people say they want but measured by their actions.
I might say I want to get fit but unless you see me out training you would quite correctly surmise I don't actually want to get fit. Everyone gets what they really want.
Bubbles come and go, some are long, some are short, some are consequential, some are not. For example, real estate bubbles: these are most dangerous because it is usually the most substantial asset purchase an individual ever makes, and it is typically 90% leverage. If you fall ass-backwards into the right spot on the development curve, you can literally turn $50k (down payment) into a million++ dollars - if you guess wrong, you're bankrupt and you pray that you have a non-recourse loan.