We often hear about people who are coined by the phrase ‘overnight millionaires’ because they seem to just appear rather than accumulate wealth slowly over time. Is there such a thing?
The truth is yes. But safe from winning lotto or being the lucky one in a million to create an app like Uber, there are no real shortcuts.
We often see people rise to riches in what seem like the blink of an eye… so let’s take a deeper look at these people and what they have in common.
The wealthy have an asset base
If you’re looking to build an empire, ensure the foundations are solid.
Overnight millionaires typically have a rock solid foundation (an exceptionally large asset base), which allows them to build to greater heights. They understand the ability to generate cash flow is directly and inextricably linked to the size of your asset base.
Distinction: When talking about our asset base we’re not referring to your car collection or helicopter pad. We’re talking about your appreciating assets.
If we look at this statement it is easy to see why, when confronted with the decision of whether to sell an asset, overnight millionaires almost exclusively decide against it and would rather hold it. They understand selling an asset reduces their asset base, which in turn reduces their potential for cash flow, which drastically stints their growth. If this is true then it makes sense why overnight millionaires are always seen to be acquiring assets (yes, I know you might be thinking Ferrari’s and yachts. But millionaires are also astute investors of appreciating assets).
Growth is fundamental in building wealth
You might fear changes in the economy, a GFC, a mining recession or a housing bubble. But in the long run, history clearly shows property can ultimately do one thing… grow. And overnight millionaires not only understand this growth, they capitalise on it.
Gary Keller and Jay Papasan state in their book The One Thing a 5mm domino will topple a 10mm domino which will topple a 20mm domino. And if we continue this progression, the fiftieth domino will literally span the distance from the earth to the moon. Now that’s profound. The principle of compounding is the reason why growth is favoured by overnight millionaires rather than quick cash from selling assets.
If we understand the first principle of establishing a large asset base, then our second principle ‘growth’ is the tool to achieve this. The quicker an asset base grows, the greater potential to grow our cash flow.
Millionaires will leverage on their investment
So, we need an asset base and we need it to grow. The next question is: how do we make our asset base grow faster?
Most of us are comfortable with the concept of investing our money to make it work for us, but the real key to growth is making other people’s money work for us. Enter: Leverage.
The most common form of leverage is a mortgage. A mortgage allows us to own a property by funding a minority share and borrowing the balance from the bank. On a very simple level, this ticks all the boxes: Buying a property increases our asset base. Historical evidence shows this property will grow over time. And assuming we haven’t bought the entire property with our own cash, we have leveraged our position.
If you borrow 50% of the purchase price (by way of a mortgage), and the property grows in value by $100k, who makes the $100k? You do! You put in only half the money, yet you are entitled to all the profit. Sounds like a good deal to me.
If you can grasp these three principles and are willing to apply them, you are light years ahead of the rest and will truly understand why yesterday is the best day to purchase property. These fundamentals of investment are how the rich make their money and how millionaires are seemingly made overnight.
Properties & Pathways is a dynamic commercial property syndicator in Australia. Get in touch today to find out more on investing alongside an experienced commercial property investor.