Rich vs Wealthy: How To Get Wealthy via Real Estate

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  • Rich vs Wealthy: How To Get Wealthy via Real Estate

stocks vs real estate choice: black man

If you want to get wealthy, you need to own assets. Period.

You can get rich by generating alot of income. But income can only take you so far. You’re trading your time for money. But assets don’t require your time or energy in order for your money to grow. That’s the difference.

That is what people mean when they say that their money works for them. It basically just means that it grows/compounds upon itself without them having to put in any extra effort. It’s like getting paid while never showing up for work.

Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”

Albert Einstein

All the other stuff about living below your means, having the proper mindset, being patient etc….is nice but we’re assuming you’re smart enough to know that already. You’re not saving your way to wealth and you have the mindset of wanting to get rich for you and your family.

Look, the quickest way to get wealthy is to make a lot of money so that you can invest in assets that grow exponentially.

If you have a great business idea and can execute on said idea, then you should definitely go do that. But 99.9% of us don’t, and aren’t entrepreneurs, so we’re going to focus on the next best thing – investing in real estate.

cartoon illustration of income vs assets

Income Growth vs Asset Growth

As a rule of thumb, your income is not going to grow as quickly as your assets. Don’t get offended or argue as there may be exceptions to the rule of course.

Here’s a simple example so that you can understand why it’s so important to invest in assets, specifically real estate.

Real estate allows you to use leverage (debt) – responsibly to buy assets. You’re not buying stocks or crypto on leverage like a degen, you’re buying the largest asset class in the world that has shown consistent growth for hundreds of years.

Quick Math Example

  • You make $100,000/yr and you buy a $400,000 house.
  • The median home price increased 8.5% from Q2 2022 to 2023 according to the National Association of Realtors.
  • A $400,000 homeowner gained $34,000 in equity. In a year!
  • That same person may get a 3-4% bump in salary, let’s call it $4,000.

So in one year, your asset grew almost 5 times more than your income ($34,000 compared to $4,000).

  • What happens the 2nd year when it grows another 4-5% from $434,000? $455,700
  • Year 3? $478,485
  • …Year 10, $675,000
black girl doing math

Are you making an extra $25,000 every year? Probably not. Or if you are, great. Both your income and your assets are growing at the same time.

Quick aside: House Hacking

If you really want to knock it out of the park, then you should house hack. We’ll spare you some more math, but essentially it means buying a 2-4 unit property and using rental income from one or more of the units to pay a portion of your mortgage.

You get to reap the benefits of all of the upside equity while saving a ton of money on your mortgage. It basically puts to bed the whole stocks vs real estate debate, but we digress.

Finally, as more of your monthly payment goes towards paying down your principal balance, you’re gaining equity/wealth while writing off the interest, reducing your tax bill even more.

Tip, pay a little extra every year if you can to reduce your interest even more if you weren’t one of the lucky ones who got a sub 3% interest rate.

Now, imagine if you owned more than one asset and they all grew. Several streams of income without you having to work for it. That’s wealth.

Why Real Estate vs Stocks

First off it’s not an either or. Buy Stocks or buy Real Estate. It’s Stocks AND real estate. And a business if you can start or buy one, and bonds, gold, crypto, art, collectibles…whatever can grow. We love it all.

That being said, we’re clearly biased towards real estate because of the fact that you can use leverage and because of the tax advantages this asset class enjoys.

leveraged real estate

Leverage – Real Estate:

  • In the $400,000 house example, you may have to put down 5% + closing costs = ~$30,000.
  • That can turn into $675,000 over 10 years assuming an avg appreciation of 6%. (We think it would be much higher per the below section).
  • Let’s say you’ve paid $100,000 off your home loan: 400K-100K = 300K.
  • You now have ($675,000-$300,000) = $375,000 in assets.
  • You still have a $300,000 loan that you will continue to pay down to build equity as your home appreciates even more.

Like stocks? Great, put $250,000 of your home equity in the market and turn it into an extra $20,000 in the first year, assuming an 8% return. Remember, you can invest in real estate AND stocks.

No leverage – Stocks:

  • That same $30,000 invested into the S&P 500.
  • Average return of 8% = $32,400 year 2.
  • …year 10 = $65,000.
  • Not bad but you’re not buying much with that in 10 years.

Honestly this isn’t a fair comparison, but the math gets tricky and relies on too many assumptions for us to model out the alternative.

For example, what is the rent vs mortgage payment? Are you investing the difference in the stock market every month? Every 2 weeks? Is it a tax protected (but illiquid) 401K account or not? We digress.

Ideally, you do both – invest in real estate AND in the markets. But if you can only do one or the other, real estate seems to be the clear winner.

Tax Advantages – Real Estate:

  • No capital gains tax when you sell up to $500,000 for married couple.
  • Write off the interest on your mortgage
  • Depreciation
  • Opportunity Zones

The list goes on…oh and you have to live somewhere anyway so you might as well build your own equity vs building someone else’s (your landlord).

Tax Advantages – Stocks

  • LOWER capital Gains Tax as long as you hold for more than 12 months.
  • Grows tax free if your stock portfolio is in a 401K, but then it’s illiquid and you get penalized for trying to access your own money before the age of 65.

There’s also a reason that the majority of assets that wealthy people own are comprised of real estate. Our people are more heavily weighted towards real estate in terms of portfolio composition, per the National Association of Real Estate Broker’s latest report – 66%.

chart of comparing net worth composition by real estate vs other assets

Our Advantage – Buy Black (The Come Up)

Black people, we’re sitting on a gold mine!

The racial wealth gap was created through hundreds of laws, unjust systems, policies, terrorist acts, redlining, racial covenenants and numerous other horrendous practices but that’s another article. The wealth gap persists but there may be a way to slowly chip away at it.

If you made it this far, then you should know that Zillow just made it plainly obvious to everyone why black folks should invest in our own communities. Our home values appreciate faster than the national average.

Although it’s difficult, for the purposes of this article we’ll set aside the numerous appraisal biases that occur in the devaluation of majority-black neighborhoods when compared to similar majority-white neighborhoods.

Apparently, things are starting to change. In early 2023, Zillow, the largest aggregator of home sales data directly from its website, found that home values in zip codes in majority-black neighborhoods appreciated more quickly than the national average.

42.5% home equity appreciation in majority-black zip codes on average in less than 4 years. That’s insane!

zillow data showing black neighborhoods appreciate faster

Please don’t count on that type of growth, but what if your home value grew 6-8% per year? In other words, if you buy a $400,000 house in a black neighborhood, it may appreciate faster than if you bought in a non-majority black zip code.

Why do homes in our neighborhood appreciate faster on average? We hypothesize that it’s because:

  • A)more appraisers are being held accountable to ensure they stop devaluing properties in our communities and
  • B) gentrification – for better or worse.

The data appears to back up this hypothesis. As you can see from the chart below, there is still a greater percentage of homes in majority black neighborhoods that end up appraising below the contract price, but these low appraisals are decreasing and the slope of this decline has recently become steeper.

chart showing appraisal gap bias

Hopefully, this means it will get closer to the 12% number for majority white neighborhoods, or better yet, single digit perentages. Time will tell, but we’re betting on people to use common sense and that this ugly racism finally abates.

Increasing property values, after spending hundreds of years depressing them for no good reason, means we all get wealthier as a nation. A rising tide lifts all boats.

Anyway, to put in terms of buying stocks, it’s like being a value investor. You buy an asset/stock that is undervalued in hopes that it will inevitably increase in value as the market realizes that it’s not being properly valued.

What cities can you be a value investor in? Everywhere, but here are some of the top cities. No surprise, it’s where alot of black folks are. Detroit, what up doe! Chi-town, where you at?

chart of majority black cities with stronghome appreciation

Black People – Take Advantage

We don’t hate any race, nationality, ethnicity, color or sexual orientation. We just love black people.

And we have a history of being denied our fair due in this country from a legal, civil, political and economic standpoint.

Let’s focus on the economic opportunity and why it might make more sense to invest in real estate in our neighborhoods if you want to build generational wealth.

If we remember one thing in Economics class, it’s the basic law of Supply and Demand. Look at the graph below. There is a nationwide shortage of housing that will not be solved anytime soon.

Anytime an asset is scarce, number go up. Why do you think home prices are still grinding upwards despite the fastest increase in mortgage rates ever? Simple, many people want to buy a home (demand) but there are not enough homes (supply) to go around.

And when interest drop, even a little…back to the frenzy of 2020-2021, and many of us will be priced out.

If you remember nothing else, remember this: You know the neighborhoods in your city. You know which blocks look nothing like they used to when you were coming up. Now, the homes on those streets are worth double what they were. Outside investors don’t have this knowledge.

Be a value investor. The data is there. Your personal experience is there. Buy black. Buy real estate on the streets you know are going to be the next to gentrify. Let’s own our streets.

Buy the block now instead of buying back the block later.

10 years from now, when your wealth grows faster because you invested in your community, you will thank yourself.