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Most mom-and-pop landlords are normal people who happened to lease out their old home rather than sell it, after moving. Which is fine, although every eighth grader knows you don’t get rich by being passive.
Still, even passive landlords and everyday homeowners are financially far ahead of the average renter. Consider that last year, the average American homeowner had a median net worth of $195,400, compared to only $5,400 for the average renter, according to a report released by the Federal Reserve. That’s a wealth difference of 36 times, based on a single variable. Likewise, the average income among renters was $40,100, while the average income among real estate owners was $112,400.
And for all that homeowners and passive landlords are getting ahead faster than renters, active real estate investors are a different breed entirely.
Active real estate investors are not normal, and they are far from average. Last year, only 13.2% of Americans owned residential investment properties. For those who did however, it added an average of $316,300 to their net worth (see the Federal Reserve report above). The investor who saves up $25,000 for a down payment on a rental property knows something that most people don’t: there are dozens of ways real estate can make you rich.
Real estate investors know that they can passively earn money on appreciation. They can also make money on monthly rents and cash flow. They save money on taxes, through depreciation, mortgage interest deductions, travel and deducting every other conceivable expense related to their investment property. They can avoid paying taxes on their proceeds from selling, using a 1031 exchange. They can live for free by buying a multi-unit property and leasing out the other units. They know that they can use other people’s money to build their own net worth, and that mortgage payments are a simple way to automatically save money every month, as each payment pays down their principal balance.
Most of all, real estate investors know that there is an asymmetry between the risks and the rewards of real estate as an asset class.
Real estate investors are not “normal” people. Normal Americans don’t even save 5% of their income each month, but real estate investors are excited to save money for investing, because they know that every new rental property adds hundreds (or thousands) of dollars to their monthly income.
Normal people make $51,939/year, working full-time for someone else, and they don’t like it. Consider a recent Gallup poll finding that 70% of Americans felt disengaged from their job.
Career real estate investors work for themselves, and work the hours they want, to create the lifestyle they want. There is even a term for this: lifestyle design. It means exactly what it sounds like: actively thinking through every aspect of your life, and shaping each to meet your desires. Annual income, weekly hours worked, when you work, where you work, the amount of time spent with family, vacation time taken… these are all designable for self-employed real estate investors. Normal people work the hours their boss asks them to, and are paid whatever their employer is willing to pay them.
And while we’re talking money, is it any surprise that the overwhelming majority of millionaires (77%) have invested in real estate?
Of course, breaking out of the “normal” mold is not easy. Learning the discipline to save 20-50% of your paycheck is not easy. Spending your nights and weekends studying under a mentor is not easy. Once your mentoring is complete, making the emotional leap of faith to quit your full-time job is not easy. Being self-employed requires tremendous discipline, which is not (you guessed it) easy. But if designing your dream life were easy, everyone would be doing it.
Normal is great when you’re talking about your health. Normal is not so great when talking about your wealth, your income, your spending habits. There are plenty of normal landlords out there, working (and hopefully enjoying) their 9-5 jobs, but if they are clever, they are also active real estate investors constantly finding new opportunities. Because ultimately, the point of all investments is to one day cease being normal, and start being rich.
Related Reading:
Want to Join the Top 20%? Invest in Retirement Accounts & Rental Properties
Case Study: How I Earned a 29% ROI on a Deal I Found on the MLS
The 25X Rule for Retiring Early (…and How Rental Properties Change the Math)
