Accumulating wealth with real estate investment begins with wealth creation. The three phases of the wealth cycle, and how making smart real estate decisions factors in.
2019 Update: Over three years ago we posted a six-part series on what we call The Wealth Cycle. It’s all about how our approach to making, keeping and distributing our wealth changes with time and our place in life.
We thought we were right on target then and we are even more convinced of that today as property values have soared since that first post back in June of 2016. After all, we are now officially in the longest economic recovery in US history and that has a lot of investors wondering if they should be taking some cards off the table.
So, let’s take another look at the The Wealth Cycle: Wealth Creation, Wealth Preservation and Wealth Distribution. Our hope is that it prompts you to look at your own situation from some fresh angles so that your investment decisions are as informed as they can be. As always, we welcome your input.
At some point in our lives we decide what we want to be when we grow up.
Some of us are fortunate enough to pick right the first time, while others hit dead-ends but keep trying until they find the one that works best.
Once found, the real work begins, and we set out to achieve our goals, both personal and financial. When those two line up, good things can happen and successful careers are realized.
The accumulation of financial resources is high on the list for most of us engaged in business. We believe that the more money we have, the more choices we have in terms of what we do, where we live, how we provide for our families and pursue the quality of life that we dreamed of at the beginning. In our role as real estate advisors, we are fortunate to connect with so many amazing people who have achieved enormous success, each in their own way.
This is one of the things we enjoy most about what we do and we are grateful for the privilege of knowing so many bright, hard-working people who achieve at the highest levels in their industries.
In this series we will discuss the three phases in what we call the Wealth Cycle.
The first is wealth creation. The second is wealth preservation and the third is wealth distribution. In each, our risk profile is different and so is the process by which we make decisions about money. As we move through life our priorities shift and the balance between the quantity and quality of our lives changes accordingly.
Thus, it is important to understand where we are in life to make decisions that keep us on the right path. We have all made business decisions we regret. Taking risks, following our instincts and having to react to unexpected circumstances don’t always work out for the best. But, looking back on our “mistakes” often reveals the fact that we lost touch with a longer view of things, and if we could do things over, we would.
This is why it is so important to consider where we are in the wealth cycle.
It is perhaps our best guide to making informed decisions that serve our ultimate goals and objectives.
So, let’s take a look at each phase of the wealth cycle to see if it offers any meaningful guidance for you.
For you, it may have started with a paper route or mowing lawns for the neighbors.
You decided that there were some things you just had to have or things you just had to do. So, you took it upon yourself to earn the money required to make it happen on your own.
That motivation spurred you to take independent action to change your circumstances. You spent the time, took the risk and sacrificed other things and activities in pursuit of your goals. As a business owner making decisions every day, you still do the same thing. You are motivated to take the risk and make the effort to achieve your goals.
Think back on how hard you have worked to build your business. You took risks, worked harder than the next guy, scrimped and saved, all so that you could accumulate enough wealth to have the freedom of choice that comes with it.
When we are in the wealth creation phase, we are generally young, ambitious and confident in our ability to succeed. Our appetite for risk is bigger, too. How many business owners have mortgaged their homes, tapped lines of credit, and otherwise put it all on the line to take things to the next level?
In the wealth creation phase, there has to be a willingness to fail and enough time to start over and do it better the next time if it does.
So, if you buy commercial real estate for investment in this phase, you must have the ability to bridge the gap between peaks in the real estate cycle. This is particularly true today for buyers.
Prices for Southern California industrial properties have exceeded the previous peak and many expect the market to either level off or go into a minor correction soon. But, for the investor with the time to go through another cycle, buying quality, functional property is still a good option for a couple of reasons. First, the cost of long-term financing is ridiculously low, which fixes occupancy/debt service costs for up to 25 years. Second, supply is short and most SoCal submarkets have little land remaining for development.
Controlling quality product for the long term provides stability for a thriving business.
Vacancy has dropped to 2% in most submarkets and very little new product is being delivered due to the high cost and scarcity of industrial land.
For existing property owners still in the wealth creation phase of their lives, it may be wise to hold on to their current real estate, despite the windfall they would receive on a sale.
These investors already own a virtually irreplaceable asset, and have the time to hold through on until the next peak in the cycle, which could move prices to even higher levels than we see today.
However, if existing facilities are inefficient or may require substantial additional investment for deferred maintenance or to cure functional obsolescence, then it may be a good time to trade up to something more suitable for the long term, despite having to pay a premium to do it.