If You Want To Be Wealthy, Don’t Focus on Owning a House–Build a Business

One truism of investing is to follow the lead of those who are building wealth.This chart reveals the foundation of the wealth of the top 1% and the next 9%; business equity, i.e. ownership of enterprises. Compare the assets boxed in red:

The wealthiest households’ primary wealth is businesses and shares in businesses. The bottom 90% depend on the family residence as a store of wealth, and on debt as a means of funding asset purchases and consumption.

Primary residences were once a reliable store of wealth–a store that was accessible to working families who were willing to pinch pennies and save up a down payment.

But now that housing has been financialized and globalized, it is prone to boom and bust cycles like every other risk-on financialized asset. Unfortunately, recent history shows that many middle-class households bought homes at the top and rode the post-bubble burst down.

Those fortunate enough to own homes in bubble-prone regions may benefit from speculating in housing, but playing this speculative game requires cashing out at the top of the bubble–something few have the knack for.

Building a profitable business isn’t easy. That’s why many of the wealthy let entrepreneurs take the risk of starting businesses and then buy the business for a premium once it has proven to be profitable.

But many entrepreneurs refuse to sell out, preferring to hold their businesses as a family asset that can be passed on to the next generation.

It’s also worth noting that the wealthiest 10% own over 90% of the securities and stocks, 84% of trusts (essentially tax havens) and almost 80% of non-home real estate (i.e. second homes and income-generating properties).

Primary residences represent a mere 10% of the wealthiest 1%’s assets.

The key take-away: focus on owning income-producing assets, not a primary residence. The second key take-away:

Don’t finance your assets with debt; finance your income-producing assets with savings and sweat equity, not borrowed money.

It is not accidental that the wealthiest 1% hold very modest levels of debt.

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  • J_Bookly

    It doesn’t make sense to use the ultra-wealthy person’s budget as a guideline for somebody who’s just getting started. Affordable homes are hard to find these days, but so are affordable rents! Take some time to find the right house and you can have a home, an office, a tax deduction, and a paid-off dwelling when you are old. Renting out a spare bedroom can bring extra income, and growing veggies in the back yard can save on groceries. You don’t need a mcmansion; you need a clean, comfortable, safe place to live. And when you’re not at the mercy of a landlord who’s seeking ever-increasing rents, you have the peace of mind to concentrate on building your business and your life.

    Um, it just occurred to me that you might have been thinking about a completely different person than the one I have in mind; my young entrepreneur is somebody in his 20s or 30s, starting a business on the side and building it over time to something that can bring in a nice income. He might be a blue collar guy who starts a home improvement business, or she might be a designer who starts an ad agency, but I’m not picturing an “investor” who has tons of cash to put into a cutting edge high-tech venture like vacations in outer space. I know nothing about that person and have no useful advice for him/her. 🙂

    • diogenes

      Economic mobility parallels distribution of wealth and income — the more inequitable the one is the more inequitable the other. Wilkinson & Pickett demonstrate this for 23 countries and all 50 states in The Spirit Bubble. America is at the bottom of this correlation. An American’s chances of rising significantly above the economic status we are born into is significantly lower than in any other “developed” country and our chances of “making it” are similarly abysmal. Smith’s “advice” might make sense for people in the 80th-90th percentile — people near the top but not in it, but for four Americans in five it is flagrant bullshit.

  • diogenes

    This is a statistical hoax. What it conceals is that the top 10% hold well over 80% of all wealth including homes and the bottom 60% hold under 4%. When housing is excluded the “share” of the top 10% approaches 90% and the “share” of 60% at the bottom drops below 2%. Mr. Smith’s cynicism is sickening.

  • Silverado

    http://www.businessinsider.com/real-estate-investment-james-altucher-buy-rent-2015-11
    IF you’re working at a good job, can afford the payment and need the write-off, great buy that house. But if you’re not, listen to James Altucher here and listen to a voice of reason….with no axe to grind. Something you won’t get listening to the govt or their failing banks trying to screw you long term on a new mortgage.

  • Jim G

    I used to teach a class in small business to lower income people. A lower income person’s business going under is a big tragedy. For most of the people in the business class, getting a good paying job would have been a much better deal – and then buying a house. Yah, I owned some stocks. But the best investment I ever made was my home, and so it is for the average Joe. I think your data simply shows that if there was a better distribution of incomes, we would sell more homes. And after all, they are homes, not houses, and families live in them together.