Ah, cliches and rules of thumb. Because if there’s anything that’s predictable, it’s a human’s ability to take a complex subject and boil it down into one pithy sentence.
My favorite example lately is John D. Rockefeller. I just got finished reading a mammoth 800 page biography on the may, which chronicled everything from his tumultuous childhood to his dirty old man stage, which I can assure you, was quite delightful. He pioneered everything from vertical integration to using science to improve his refining yield. His institute revolutionized charitable giving. And yet, there’s a dividend investor I know who just likes to repeat a quote of his about how the only thing that made him happy was getting his dividend cheques.
It’s with this in mind that I present today’s blog post topic, all about millionaires in real estate. Specifically, do 90% of millionaires come from real estate? Also, how do I sleep at night? And what’s that smell from your armpits? Is it cheese?
TOO MANY QUESTIONS.
On the surface, it seems pretty reasonable to say 90% of millionaires come from real estate. There’s a reason why I’ve continued to suggest it as an easy way for most of you reading this to build wealth. Since we have a government that all but rolls out the red carpet to real estate buyers, it’s easy for someone to build a real estate portfolio.
With real estate, you can:
- Use a 5% down payment to borrow up to 20x your original investment. With stocks, the maximum is what, 2x?
- Use equity in one property as a down payment for another. By the way, “prudent” Canadian lenders do this all the time, and have been for years. I did it a decade ago.
- Count up to 80% of a rent cheque as income for a mortgage, even though you might just be taking it to the bank.
- Line up private investors pretty easily, especially if you’re flipping.
- Have dozens of lenders willing to give you money, charging anywhere from 1.9% to 19%.
Because real estate tends to go up, the inherent leverage in the strategy works out. You put down your 5-10-20%, collect a rent cheque for approximately 10-15 years, and eventually you’ll own the place. Do that a few times as a young guy, and you’ll inevitably end up a millionaire. It’s easy, yo.
Plus, there are countless people in Toronto and Vancouver who are technically millionaires because they bought a reasonably priced house in the 1970s or 1980s and have held it for years, watching it appreciate into an asset worth at least seven figures. Combine that with even modest retirement accounts, and we have a whole bunch of millionaires off mostly real estate.
But are these people really millionaires? In my book, the answer is no. I’m not entirely sure your principle residence should count in your net worth. Sure, you can borrow against it, or even take out the dreaded REVERSE MORTGAGE (or, as your kids call it, the inheritance killer), but all that equity doesn’t do much good unless you sell and put it to use.
So while perhaps the sentiment of the expression might be true, I’m not sure it’s technically true when put up to rational thought.
Where does millionaire wealth come from?
There’s an easy way to bust the 90% of all millionaires come from real estate myth. We can find stats that show us where millionaire wealth comes from.
In 2012, Fidelity interviewed more than 1,000 millionaires to ask them about their portfolios, outlooks, and so on. Here’s the highlights.
- The overwhelming source of wealth for these millionaires was their career.
- In 2012, most millionaires were buying domestic equities as their top investment.
- Millionaires that were born wealthy are more likely to invest in real estate.
- Millionaires that were born rich are more likely to wish to maintain rather than grow their wealth.
Now there may be a bit of bias in that Fidelity study. After all, if you’re working with Fidelity, you might be more inclined to invest in stocks, therefore avoiding real estate. So let’s look at a breakdown of asset classes owned by all rich folks.
That’s from Statista, which measures the asset allocation of high net worth individuals. As in, we took out all those people who have barely scratched into millionaire status, just leaving the actual rich folks. And as you can see, most don’t have much real estate at all, even though most probably own their own homes.
So do 90% of millionaires come from real estate? Perhaps, but that’s only if you count those people who barely scrape in by counting their principle residence. If you exclude those people and count those are are truly wealthy, the answer is really simple. No, 90% of millionaires do not come from real estate. Most millionaires come from a combination of success at work, owning a business, and investments, mostly in equities. Sorry real estate investors.