CNBC.com posted an article that really resonated with us at Delarosa. So much of it is exactly what my partner, Evan Shweky, talks about in his myriad of speaking engagements, guest appearances on Clubhouse and the variety of podcasts he is invited to participate on. Here is an abridged version of the article's 8 points with our commentary as it relates to both active and passive real estate investors.
1. They don’t diversify their investments right away.
"It’s generally good practice to diversify your portfolio by investing in a mix of different stocks, funds and other investments. But as the wealthiest people build their net worth, they often go all-in on their own projects, and then diversify as they start earning more. Elon Musk, for example, bet the $22 million he made selling his first company, an online business directory called Zip2, entirely on his next business, an online banking service called X.com. After X.com merged with PayPal, he made $180 million off PayPal’s sale to eBay. That gave him the cash to invest in Tesla, SpaceX and other ventures."
Delarosa: We tell our first-time borrowers this regularly: Pick one area of investment, focus and make that a success. That first investment is the seed money for building your empire. Once you have succeeded in that one investment area you can consider diversifying.
2. They know that debt is for businesses, not people.
Wealthy people never accumulate interest on a credit card. You do not want to waste money paying interest. "Instead, put everything into generating more money. …If you’re trying to build a business, debt can help you earn money by giving you access to income-generating assets sooner rather than later."
Delarosa: This is exactly the value of a hard money loan for a real estate investor. Unlike a traditional bank, we can close very quickly, sometimes within 24-48 hours and there is no prepayment penalty despite being short-term. It gives you quick access to the capital you need to renovate or build an income generating asset. The interest you pay is an expense just like any other business expense on your balance sheet but after expenses, the return on investment is greater. Credit card debt is the opposite - you just paid more for the thing you purchased. Not a smart way to build wealth.
3. Homeownership isn’t always their first investment.
"You might think that buying a primary residence is The American Dream, but it is rarely what you see the wealthy go for first." In addition, "homeownership doesn’t always see the same return on investment as other places you can put your money."
Delarosa: At Delarosa we do not see our homes as part of our personal investment portfolios. The longer you live there, the more likely the carrying costs will outweigh the appreciation.
4. Cash-flow real estate is the place to protect and grow money.
"On the flip side, cash-flow real estate — commercial real estate where you are making a monthly profit off of rent after your mortgage payments, property taxes and maintenance — is a great way to grow your money. You can make passive income off ownership of these properties, and it is often easier to sell them than a primary residence. When you sell a primary residence, you have to find a buyer who can envision themselves living there. When you sell a profitable rental property, you only have to find a buyer who wants to make a profit."
Delarosa: Not much more needs to be said about this one. Along with Delarosa’s hard money lending business, we have a portfolio of multi-family apartments and we can attest to the cash flow benefits and tax advantages among other things. For our investors who are looking for a passive versus active investment, our real estate mortgage investments offer consistent cash flow options that stocks and most other passive investments cannot.
5. They always buy in bulk.
"The wealthy are willing to spend more on each purchase in order to get a better price per unit and save time spent on repeating useless activities. This can apply to a business — the rich may contract to buy bulk supplies or equipment — or to your personal life."
Delarosa: This applies to many opportunities in real estate investment. For our apartment portfolio, we often buy replacement appliances and materials once a year in bulk to use as needed. The discounts can be tens of thousands of dollars. For real estate investors, if you have reached a point where you can manage the renovation of multiple properties, purchasing two, three or more to work on at a time will allow you to buy materials and even services at a discount. You will save money if your subs are able to work on multiple projects in the same vicinity at the same time. Even buying real estate in bulk is beneficial. Buying an income generating property with one tenant, as an example, needs one hot water heater. Buying bulk, a multi-family with multiple units still needs only one hot water heater.
6. They invest in their network.
"I have never had someone invest in me that didn’t know me. And most of the real estate I own today was purchased from sellers who picked me over other qualified buyers because we had existing relationships, and they had confidence in my ability to close. The more someone gets to know you, the more they will trust you and believe in your talents and skills. This leads to better opportunities, speedier decision-making and higher margins. So invest time and resources into making and maintaining the right connections."
Delarosa: As a real estate investor, your network should include everything from lenders to brokers to subcontractors to mentors. Finding good people to share deals or ideas with will drive success. It is a relationship business. A significant portion Delarosa’s borrowers, as well as our investors, have come to us through referrals and we are happy in turn to share our network with them. Check out our friend Steve Rosenberg’s book; Make Bold Things Happen for some practical and employable networking advice.
7. They are never content.
"The wealthy are never satisfied with their previous achievements. They believe they can always achieve more. This helps them think big about future business ideas, inventions, investments and other wealth multipliers."
Delarosa: Real estate is one of those areas where you can build a successful business or portfolio and because people always need housing or commercial space, you can find ways to continue to feel inspired by expanding your portfolio (storage units, mobile homes, AirBnB properties, shipping container homes, tiny houses...) or your services. And don't worry, if you run out of brick-and-mortar ideas, the metaverse is calling.
8. They don’t waste time trying to do everything themselves.
"The wealthy know that time is the only truly scarce resource. You can’t buy more of it. So, they maximize their time by letting go of the need for control every small detail of their business or portfolio, and learn to effectively outsource and delegate to good, smart people who will trade their time for money."
Delarosa: This last one is actually a lesson that Evan and I have struggled with as Delarosa continues to grow. I remember Mike Bloomberg’s advice to me when I got my first big job building and running Bear Stearns Digital Media Incubator: “Always hire people that are smarter than you.” Businesses have a lot of moving parts, and in the beginning you end up doing a lot of things that you are not good at out of necessity. You need people around you that have skills you do not have or you will not have the time to do the things that will grow your business, like raising money – often a full time job in and of itself. I saw a great quote once: “If you are doing your own paperwork, you are the secretary.” Be the CEO. Find good people and delegate even if it is just a virtual assistant or occasional part-time person to start, you will build to additional full time staff much faster.
The big takeaway...
Three things were not in this list but possibly the most important pieces of information regarding the dream of building wealth or your own personal empire. We see so many stories about the 30 year old billionaire tech genius who started out of his college dorm or the 24 year old real estate mogul who did not finish high school and in just a few years were multi-millionaires. Most self made, ultra wealthy people will tell you: One, it did not happen overnight but generally over many years; Two, it did not come from one or two big wins but “trial and error,” so mistakes along the way, some of which were likely painful; and Three, take heart, most did not start in their 20s or even 30s, these were their building, learning and growing years. Last, if you want think about money the way ultra wealthy people think about money, know that it is not how to live a luxury lifestyle, but how to get to a place where you can choose to live one if you wish. So, heed this advice and we’ll see you at the top!
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