It's possible that the Vanderbilt’s (Cornelius Vanderbilt & his heirs) fortune which is now vanished could have remained alongside that of John D. Rockefeller, whose heirs hold onto an estimated net worth of $11 billion as of 2016.
What was the difference between the Vanderbilt’s and Rockefellers?
The Vanderbilt’s squandered their fortune on depleting assets — wealth-diminishing assets with limited life — while Rockefeller parlayed his wealth into productive assets, evidenced by the family trust's considerable real estate holdings.
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Known for their lavish parties and their free-wheeling spending on everything but productive assets, Vanderbilt's wealth — estimated at $100 million ($200 billion in today's dollars) at his death — was gone in 50 years. Vanderbilt had built generational wealth through his business holdings, but he didn't take the necessary measures to ensure the lasting legacy of that wealth. Rockefeller, on the other hand, put the financial decision-making over his fortune in the hands of trust administrators designed to maintain the family's wealth — much of it through cash flowing real estate (even owning the World Trade Center and Rockefeller Center at one point).
For more average Americans, the numbers may be different, but the outcomes are similar. Many aging Americans are not prepared for retirement. In a 2019 report from the Insured Retirement Institute, 45% of baby boomers had zero savings and many planned to work well into their retirement years. Added to that, lack of financial preparation (along with other economic factors) has impacted the next generation, as boomerang kids — adults who move back home with their parents — pose a threat to baby boomers' retirement.
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How to avoid the fate of the Vanderbilts and the millions of Americans ill-prepared for retirement? Parlay more savings into productive assets that build wealth than into wasting assets that deplete resources. You can earn a million dollars a year, but if you spend it on depreciating assets, there's little or nothing left to invest in assets that produce wealth. This potentially puts you on a path similar to Vanderbilt's, where even retirement income can be jeopardized alongside generational wealth.
An important crossroad you'll arrive at and a junction where you will have to make the critical decision is when income is high enough for you to experience a surplus — after financial commitments are met. Deciding what to do with the surplus will set you on a course to improved financial freedom or panic as retirement approaches.
One avenue for any surplus is the productive asset of real estate. It's a path many of the Rockefellers of the world have created for themselves to help build and maintain generational wealth. To understand the attraction to this particular asset, here are a few of its multifaceted advantages.
Passivity
Although cash flowing real estate can be acquired directly, the wealthy outsource day-to-day operations and other managerial duties to third parties. For investors who prefer to invest in real estate through passive vehicles like private real estate funds or real estate private equity, almost all decision-making is left to the managers of these firms — no expert knowledge required.
Passive real estate investments don't require a full-time commitment and leave the headaches to someone else. The passive nature of real estate also allows investors to leverage their capital across multiple assets to generate multiple streams of income instead of sinking all of their assets into a single asset.
Illiquid
Because real estate is illiquid, it's insulated from mob mentality and broader market volatility because it cannot be easily disposed of. Investors in passive investment vehicles typically lock up their capital for long periods of typically at least five years. Illiquidity protects investors from themselves and prevents them from making snap decisions in a fleeting moment of panic they might regret later.
Easily Transferable
Real estate is easily transferable to succeeding generations. The wealthy set up trusts to hold their real estate assets, and upon the death of the grantor, ownership automatically transfers through the trust. Real estate conveyances at death are much less complicated than conveyances of business disagreements that may arise in roles, compensation, contributions, distributions, etc.
Sustainability and Predictability
Real estate is a proven commodity. There may be down years, but in the long term, real estate constantly appreciates and cash flowing real estate generates consistent income. Trends come and go in other industries and sectors, but real estate continues to be consistent.
Real estate isn't the only asset capable of creating generational wealth that grows over time, but it is often found in the portfolios of those recognizable names like Rockefeller.
Although real estate values can fluctuate from time to time, over the long haul, real estate has consistently appreciated over time from inflation and its intrinsic value. Investing in the class can help you generate wealth for not only yourself but future generations.
Generational Wealth
Financial success will look different for everyone, whether you’re looking to get out of debt, increase your income, or beef up your savings account. Luckily, there are many different ways to obtain financial success, and there is no single “right” way to accomplish that goal. One of the most common ways to achieve financial success is through building generational wealth that will benefit your family for years to come.
Why?
Generational wealth is wealth that exceeds your lifetime; it can be passed on to your family and create opportunities for them to advance their upward social mobility further. In short, generational wealth is enough for you to ensure that you and your future generations live comfortably.
Building generational wealth starts with you.
Though amassing generational wealth might seem like an overwhelming and impossible feat, the truth is that it is possible, so long you approach it correctly. One of the proven methods of building generational wealth during your lifetime is real estate investment.
Not sure if it’s the right option for you? Don’t worry! Here’s everything you need to know about building generational wealth through real estate investment.
What is Generational Wealth
Generational and legacy wealth is accumulated during one generation and passed down to the next, typically upon death. In this way, generational wealth provides financial stability for the earners and their families up to the next generation.
Typically, generational wealth is free of encumbrances, meaning that it’s essentially “free” money used to maintain or improve the next generation’s quality of living. The legacy funds can be used to fund academic opportunities, secure housing, jumpstart a business, and more.
Generational wealth provides a distinct advantage to its recipients. As many opportunities, such as a college education, extracurricular activities, travel, and entrepreneurship, require significant financing. Recipients have access to these opportunities, as generational wealth allows them to pursue them solely because they can afford them.
The Wealth Gap
There is a significant generational wealth gap in the U.S. that has allowed those with generational wealth to acquire and accumulate it. In contrast, those without generational wealth continue to struggle to get by. Generally, the evidence of a generational wealth gap is starkest between Black and white families.
This is primarily due to the historic systemic oppression of Black Americans. We can trace the wealth gap to the founding of the U.S.; while white families were beginning to build wealth and own land, Black families were enslaved and separated. Following the emancipation of Black American slaves, a series of events impeded every effort of Black Americans to gain wealth. Some of these events are as follows:
The Congressional failure of the Freedman’s Savings Bank
The 1921 Tulsa Massacre (Destruction of Black Wall Street)
Jim Crow Era “Black Codes” (limited land ownership & job opportunities for Black Americans)
Redlining Practices Beginning in the 1930s
G.I. Bill Failures to Protect Black Americans
While this is a long list, undoubtedly, many more events and practices have contributed to the growth of America’s wealth gap. Black Americans weren’t even given a fair opportunity to gain wealth to pass on to their children or grandchildren. Currently, the wealth gap exists in every income group from the bottom to the top 10%. Even for those in the top 10%, the median income for a white household is $1,446,140 more than that of a Black household…
How Real Estate Builds Generational Wealth
Wealth is made up of a variety of assets, both fixed and liquid. A liquid asset is an asset that can be quickly converted to cash, while a fixed or non-liquid asset cannot be converted to cash easily. Real estate is considered a fixed asset because it is not likely to be sold quickly to generate money and is usually held long-term.
As an asset, real estate is liable to appreciate depending on the market, therefore offering its owner a chance to sell for a profit. Additionally, real estate can serve the dual purpose of financial investment and a housing solution. It offers the perfect opportunity to pay down your mortgage loan, build equity, and add a significant sum to your net worth.
Mortgage loans are typically paid over decades; 30-year terms are most common. Completely paying off your mortgage loan before your death or passing it down to your children or grandchildren can build generational wealth. Even if your beneficiaries have to pay some of the mortgages, they are still gaining ownership of a home at a significantly lower cost than they would have otherwise.
How to Invest in Real Estate to Build Wealth
Real estate is relatively accessible, even for those who aren’t well-versed in real estate investment. Many financing options offer financial incentives for those purchasing their first home, and the starting investment can be as low as 1% of a home’s sale price. Buying your first home can serve as your first real estate investment and allow you to begin the process of building generational wealth.
While a single residential home is a great inheritance, it won’t generate the type of wealth that will leave your family comfortable for more than a single generation. When it comes to creating and cultivating generational wealth, it’s good to enhance your investment portfolio with multiple properties over a long period.
Unfortunately, building generational wealth is a long game, and if you want your family to reap the rewards, you’ve got to play along. Here are some tips to help you begin your journey to generational wealth-building through real estate investing.
Buy a Residential Property: Unless you’re knowledgeable about commercial property investment, it’s best to stick to residential property investment. It’s a safe bet, as you can rent it out, live in it, and easily pass it on or sell it.
Consult a local Real Estate Professional and a Financial Advisor: Be sure to work with an experienced real estate agent, as they’ll be able to work with you to find a property that meets all of your needs. A financial advisor can help to ensure that you reap all the tax benefits of owning the property, plan to pass it on, and help you build a diversified investment portfolio.
Buy an Investment Property: An investment property isn’t the one that will serve as your primary residence. This is the property that you will rent out, sell, or use another investment strategy to gain a financial benefit.
Pay Off First Home: Even if you invest in multiple different properties, paying off your first home should be your priority. Not only will this help to ensure that your beneficiaries don’t have to continue to pay the mortgage on the property, but it also frees up your income to invest in another property.
Pick your strategy, ie. Buy & Hold, Fix n Flip, or Invest REITs: There are many different ways to maximize your real estate investments. Each method offers distinct benefits and drawbacks, so it’s essential to research them before making a final decision. A financial advisor is your best bet when it comes to determining which strategy is best for you. Be sure to discuss things like initial investment, potential ROI, and diversification.
The Benefits of Generational Wealth
If your goal is to ensure that your family’s future generations can live comfortably, then it’s them who will be reaping the most benefits. However, that’s not to say there’s nothing in it for you! Your real estate investments can certainly benefit you during your lifetime before being passed down to your family.
Before you make a final decision about whether real estate investment to build generational wealth is right for you, do your due diligence. It’s crucial to understand everything you and your family stand to gain, to make an informed decision.
Here are some of the benefits of building generational wealth through real estate.
Long-Term Financial Stability: As you pay down the mortgage(s) of your investment property, you gain equity, which you can use to your advantage by taking out a home equity loan. Additionally, if the property appreciates, you can benefit from a large profit margin at the sale time.
Potential Income Streams: Renting out properties allows you to generate multiple streams of income. In many cases, the income from the rent payment can cover the cost of the mortgage. This means that the property is essentially paying for itself and reduces the financial burden on the owner.
Tax Benefits: Institutional benefits created to protect your earnings and wealth, such as 1031 Exchanges and the ability to write off unexpected losses such as property loss and/or depreciation, offer incentives to real estate investors. These tax benefits can reduce the amount of taxes owed on the sale, ownership, or transfer of the property.
Key Takeaways
Generational wealth is one of the best ways to give your beneficiaries the best chance of success in the future. That’s why it’s essential to work to build wealth during your lifetime actively, and real estate is an effective way to achieve generational wealth.
If you’re working to build generational wealth, discuss your options with a realtor and a financial advisor. A realtor will use their expert knowledge to ensure that you purchase property that meets your needs. A financial advisor will work with you to build an investment strategy to help you achieve your building generational wealth goals.
Finally, generation wealth isn’t the only gift you can give your beneficiaries. Providing your children with an education in financial literacy and teaching them the importance of responsible money management can give them a tremendous economic start, regardless of their background.