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How Real Estate Builds Generational Wealth

One of the things that invariably happens as people start to acquire assets is they begin to ask questions like; “Who is going to inherit all the things I have labored so hard for?”, “Will they value these assets the way I do and protect them by making wise choices?” and “Will they squander my hard work on parties and unnecessary luxuries?” It doesn’t matter if the asset in question is a home that has been paid off or a valuable art collection. You want to know that after your passing, the assets will be managed in a way that would make you happy. The steps you take to answer these questions and ensure your assets are not wasted by your heirs is a vital step to creating generational wealth.

 

What is generational wealth?

 

Generational wealth is wealth kept within a family for multiple generations. That wealth would have originally been built in one generation. At the time of their passing, the individual who created the wealth passes it down to their children, who would, in turn, be expected to hand it to their children. If this happens, that wealth can remain in the family for hundreds of years.

 

Desk with laptop, papers, cash and a calculator

For wealth to stay in a family, the original person who built the fortune often has to put things in place to keep the assets from being frittered away. If the wealth-builder fails to do this, the next generation can quickly lose even the largest fortune. This was the case with Cornelius Vanderbilt and over $100 million that he left; 50 years after his death, the money was all gone.

 

You might find yourself in a position where you are beginning to acquire substantial assets and are looking for a way to protect that wealth for your descendants. What are the ways to do this?

 

Every strategy has two things that seek to take personal wealth and transform it into generational wealth. These are competent wealth managers and productive assets.

 

1.    Wealth managers

Wealth managers assume financial decision-making for a wealthy family’s assets. They offer a range of services that ensure the accumulated wealth is protected and keeps growing. Having financial managers over the family assets ensures the fortune is not left to the family members’ competence and experience (or inexperience).

 

2.    Productive assets versus depleting assets

Hand with thumbs up under note reading "profit"

 

Productive assets generate profits and cash flow. Depleting assets, on the other hand, do not produce profits. Examples of depleting assets are luxury items that lose value once you have paid for them. Productive assets become more valuable with time and earn a stable income for the owner. The two most common examples of productive assets are stocks and real estate.

 

Real estate: The best asset for building generational wealth

 

When you invest in stocks, there are two possible ways you can earn returns through appreciation in the value of the stocks and dividends. Similarly, you can make profits from real estate through the rental income generated by the property and increments in the property’s value. Real estate and stocks are both productive assets, but real estate has some advantages.

 

·        Control and passivity

Real estate offers investment just the right combination of control over the asset and the passivity they want from an income-generating asset. Unlike stocks, where the asset owner can’t do much to influence its growth, real estate investors have a lot of opportunities to affect the performance of their investments. At the same time, they can transfer the day-to-day operation of the property to a property manager.

 

·        Illiquidity

Unlike stocks, real estate is not easily sold. It takes some time to get a property ready for listing and find a buyer, which means when you put your money into real estate, you secure it from rash decisions. It is easier to sell stocks on a whim than real estate. Decisions made in the spur of the moment are among the most common reasons accumulated wealth is quickly lost.

 

·        A stable asset

Real estate value is tied to the land, a tangible asset with a finite supply. Because the property has practical uses, its value is more stable than the value of stocks. Moreover, real estate is less vulnerable to market volatility than stocks. Where the price of stocks can crash in a week, property prices typically take months to change significantly. Furthermore, even if real estate prices drop for a short period, they historically tend to always trend upwards in the long term.

 

·        LeveragePaper with mortgage rates and person pointing to numbers with a pencil

The fact that you can use leverage to acquire real estate and use your properties as security to get bank funding is important. Because real estate is a tangible asset with real value, lenders are willing to accept it as collateral, unlike stocks. Thus, while earning rental income and appreciating, your property investment can also become a tool for further expanding your wealth.

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