What do Wealthy People Do Differently?
Wealthy individuals have long understood the power of hard assets, particularly property, as a cornerstone of their wealth-building strategies. These tangible investments not only provide security but also offer significant opportunities for long-term growth. In this blog, we’ll explore why property is such a popular choice among the wealthy, how it works as a hedge against inflation, and the dynamics of leveraging debt to create compounding wealth.
What Are Hard Assets?
Hard assets are physical, tangible investments with intrinsic value. Unlike soft assets such as stocks or bonds, which depend on the performance of a company or institution, hard assets hold value independently. Common examples include:
Real Estate: Residential homes, commercial properties, industrial spaces, and raw land.
Precious Metals: Gold and silver, valued for their rarity and historical significance as stores of wealth.
Commodities: Oil, timber, and agricultural products, which are driven by global demand.
Hard assets provide stability, especially during periods of economic uncertainty or financial market volatility. They are less likely to experience dramatic swings in value compared to soft assets.
Example of Stability in Hard Assets
Consider the case of a gold investor during the 2008 Global Financial Crisis. While global stock markets lost nearly 50% of their value, gold prices surged as investors sought a safe haven. Similarly, during periods of uncertainty, property values in desirable areas tend to remain stable or appreciate.
Why Property Is a Favored Hard Asset Among the Wealthy
1. Property as an Inflation Hedge
One of the primary reasons wealthy investors favor property is its ability to act as a hedge against inflation. Inflation erodes the purchasing power of money over time, meaning that the same dollar buys less in the future. However, property values and rental income tend to rise with inflation, preserving and growing wealth.
Rising Asset Value: As inflation pushes up the cost of labor, materials, and land, the price of real estate typically increases. This ensures that property owners maintain their purchasing power.
Inelastic Demand: Housing is a necessity, and demand remains consistent even during inflationary periods. This steady demand helps property values hold firm, especially in high-growth areas.
Example: The Sydney Housing Market
In the early 2000s, a modest house in Sydney’s inner suburbs might have been purchased for $500,000. By 2023, similar homes were selling for over $2 million, driven by a combination of inflation, population growth, and limited supply. For the investor, this represents a quadrupling of their initial investment.
2. The Power of Leverage
Leverage, or using borrowed money to finance investments, is one of the most powerful tools in property investment. It allows investors to control high-value assets with relatively little capital.
How Leverage Works: When you buy a property with a mortgage, you’re using the bank’s money to purchase an asset that appreciates over time. This magnifies returns because the growth in property value applies to the total asset, not just your deposit.
Debt Reduction Through Inflation: While property values rise with inflation, the value of your mortgage debt decreases in real terms. Over time, repaying a fixed loan becomes easier as wages and income increase.
Example: Leverage in Action
Imagine an investor purchases a $1 million property with a $200,000 deposit and an $800,000 loan. If the property appreciates by 5% annually, its value will rise to $1.63 million in 10 years. Meanwhile, the $800,000 loan remains unchanged (excluding interest), leaving the investor with equity of $830,000—a 415% return on their initial deposit.
3. Rental Income: A Reliable Cash Flow
Wealthy investors also value property for the consistent cash flow it provides through rental income.
Steady Income: Rental properties generate a regular stream of income, which can be reinvested or used to pay off loans.
Inflation-Proof Returns: Rental yields typically rise alongside inflation, ensuring that property owners maintain positive cash flow over time.
Example: Growth in Rental Yields
An investor purchases a Perth townhouse in 2015, renting it out for $500 per week. By 2024, as demand for housing increases and inflation drives up costs, the weekly rent rises to $700. This additional income strengthens the investor’s cash flow and overall return.
4. Wealth Preservation Across Generations
For wealthy individuals, preserving wealth is just as important as growing it. Hard assets like property are ideal for long-term wealth preservation and transfer across generations.
Tangible Value: Unlike shares or other paper assets, property is a physical asset that holds its value over time.
Tax Efficiency: In Australia, property offers tax benefits such as negative gearing, capital gains tax discounts, and depreciation deductions. These reduce holding costs and make property an efficient vehicle for preserving wealth.
Legacy Building: Real estate can be passed down to heirs, ensuring financial stability for future generations.
Example: A Byron Bay Legacy
A family purchases a beachfront property in Byron Bay for $1 million in the 1990s. Today, the property is worth over $10 million. Not only has the family secured substantial financial growth, but they’ve also established a valuable legacy for their descendants.
5. Diversification and Stability
Property provides diversification for investment portfolios, reducing overall risk.
Counter-Cyclical Performance: Property values are less volatile than stocks and often perform well during periods of economic uncertainty.
Safe Haven Asset: In times of financial instability, investors turn to property for stability, knowing that its value is tied to tangible factors like location, infrastructure, and demand.
Example: Resilience in Australian Property Markets
During the 2008 Global Financial Crisis, Australian property markets demonstrated resilience. While global stock markets plummeted, cities like Melbourne and Sydney saw only minor price corrections, with values rebounding quickly.
How Hard Assets Outperform Debt Over Time
Understanding the interplay between inflation, asset appreciation, and debt is crucial for appreciating the value of property investments.
1. Inflation Drives Asset Growth
Inflation averages 2-3% annually in most developed economies. Properties in high-demand areas, however, often appreciate at much higher rates due to factors like population growth, urbanization, and limited land supply.
2. Debt Decreases in Real Terms
While inflation increases asset values, it also erodes the real value of debt. A fixed-rate mortgage remains the same in nominal terms, but its relative burden decreases over time as wages and rental income rise.
Example of Debt Dynamics
An investor secures a $500,000 loan to purchase a property. Over the next 15 years, inflation causes wages and rents to double. While the loan amount stays fixed, repaying it becomes significantly easier, effectively reducing its burden.
3. Rental Income Grows With Inflation
Rental yields typically increase over time, creating a growing income stream that aligns with inflation. This ensures that property investments remain profitable even as costs rise.
Why This Strategy Works for the Wealthy
Wealthy individuals successfully use property as a tool for wealth creation and preservation because they understand the dynamics of hard assets and leverage.
Access to Resources: Wealthy investors can afford to acquire high-value properties in premium locations with strong growth potential.
Professional Advice: By working with mortgage brokers, property managers, and advisors, they maximize returns and minimize risks.
Long-Term Perspective: The wealthy focus on compounding returns over decades, recognizing that property is a long-term game.
Example: Compounding Returns
A wealthy investor purchases a portfolio of properties worth $5 million. Over 20 years, the properties appreciate at an average rate of 6% annually, doubling in value to $10 million. Meanwhile, rental income has also doubled, providing a consistent cash flow.
Common Concerns About Property Investment
Even with its advantages, property investment isn’t without risks. Wealthy investors mitigate these by:
Diversifying Across Markets: Investing in multiple locations to spread risk.
Staying Informed: Monitoring market trends and adjusting strategies accordingly.
Seeking Professional Guidance: Engaging mortgage brokers, financial planners, and tax specialists.
Final Thoughts
Investing in hard assets like property is a proven strategy for preserving and growing wealth. By leveraging inflation, appreciating assets, and rental income, property owners create compounding wealth that stands the test of time.
For wealthy individuals, property is more than an investment—it’s a cornerstone of financial security, a hedge against inflation, and a legacy for future generations.
If you’re ready to explore property investment, reach out to a trusted mortgage broker for guidance tailored to your goals. With the right strategy, you can harness the power of hard assets to secure your financial future.
