Michael Yardney, a director with Metropole Property Strategists, offers property advice and advocacy to his clients. In this featured article, Mr. Yardney gives us an interesting analysis of how the wealthy tend to make their money.
As you will see, the wealthy do some things very differently from the rest of the population that helps to increase their wealth. Geared towards property investing specifically, Michael explains these differences in this edition of Financial Freedom News. FFN Editors
Why property investors develop financial freedom
Friday, 06 September 2013 08:19
How did they do it? How can we do it too?
The truth is wealthy people don’t do different things; they just do things in a different way – from the way they think to the actions they take.
I’ll let you in on a little secret – not everybody has to work hard for their money.
People who own businesses have employees who are willing to work for money, whereas the business owner generally has his money working for him. The same is true for investors, their money works for them.
It’s called passive income. Being a property investor or a business owner is like owning the proverbial money tree – you control something that makes money for you, without the need to even be there.
In his Rich Dad, Poor Dad series of books, Robert Kiyosaki explains how the rich differ from the poor. It’s not just because they have more money. The main difference is how they think about and interact with their money and that when it comes to how people make money, we can all be placed in one of four categories.
1. The employed – have a job
Employees trade hours for dollars; however, what they really get are leftovers – after the government takes its share in taxes.
“So what? They do that to everyone!” you may be thinking.
Well no, they don’t. Business owners and investors only pay tax on what’s left over after their bills are paid.
Wouldn’t it be nice to only have to pay tax on what you don’t spend?
2. The self-employed – own a job
Self-employed people and professionals usually want to be their own boss. They’re prepared to work hard, but often what they’ve done is swap one boss for hundreds of bosses – customers or clients.
In reality, self-employed people aren’t business owners – they still work for their money, but they’re somewhat better off than employed people because they’re able to take advantage of tax deductions that allow them to pay their business expenses before being taxed on what’s left over.
3. The business owner – owns a system and people work for them
The true business owner not only doesn’t have to work, he doesn’t have to be at work every day, because he has a system and people to do it all for him, and possibly even supervisors to manage his workers.
The true business owner asks, “Why do it yourself when you can employ someone to do it for you?”
After initially investing in a business idea, and a business system, they let the money they have invested – which is now in the form of a business – work for them.
4. The investor – money works for them
Investors don’t have to work either, because their money works for them.
If you hope to become rich at some point, you have to belong to this group; because investors convert money into wealth.
Obviously, you’re not going to jump from being an employee to a full-time investor overnight. But you can start taking the steps to move from being an employee or self-employed, by building your own property portfolio.
Done correctly, income-earning residential real estate can be your vehicle for getting out of the rat race!
There are also many legal tax advantages available to investors. One of the reasons the rich get richer is that in some cases, they make millions and legally pay very little tax. That’s because they build their assets, not their income and make their money as investors, not workers.
Imagine you own investment properties worth $1 million that increases in value by 8% each year. In 12 months your asset base will have increased by $80,000, yet no tax is payable on this. Wealthy property investors can borrow against the increased value of their assets and use the money to reinvest or live off.
Where do you stand?
Which category do you fit in? Are you an employee, self-employed, a business owner or an investor?
In the past there has been a slow but steady transfer of wealth from employees and self-employed to business owners and investors. They’re all playing the same game, but each group is playing with a different set of rules and their mindsets are poles apart.
Employees and the self-employed work harder and harder, trying to build cashflow, yet many dig themselves deeper into a hole of consumer debt.
In the meantime, business owners and investors slowly build up their assets. The employed and self-employed pay the most tax, while business owners and investors take advantage of legal tax loopholes.
Logically, if you want to become wealthy you are going to have to become either a business owner or an investor. It’s just too hard to become rich as an employee or self-employed worker.
Does that mean you should give up your day job?
Not necessarily. Many employees have become very successful investors – in particular, property investors.
So rather than relinquish your job, I suggest you start educating yourself with the aim of becoming a property investor – initially in your spare time and then maybe, if you choose, on a full-time basis.
Should you become a business owner?
Most small businesses fail in the first five years.
In general, I think the opportunity to become rich through successful property investment is much easier for the average Australian. That’s why I recommend you seriously consider making your fortune as an educated, financially fluent real estate investor who treats their property like a business.
(Michael Yardney is a director of Metropole Property Strategists, who create wealth for their clients through independent, unbiased property advice and advocacy. Subscribe to his Property Update blog).
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(Disclaimer: The views expressed in this article are strictly those of the author. They do not necessarily represent those of FFN. Please use due diligence prior to applying the concepts and recommendations and/or in purchasing products or services from the author.) FFN Editors