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. This got me thinking – is there such a thing? Well the truth is YES, but safe from winning lotto or being the lucky one in a million to create an Uber-like app, there are no real shortcuts.
And yet 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.
- An asset base: If we’re looking to build an empire, then you better ensure the foundations are solid. The overnight millionaires typically have a rock solid foundation (an exceptionally large asset base) which allows them to build to greater heights. The overnight millionaires 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 you’re appreciating assets. If we look at this statement in the context of asset sales, it is easy to see why, when confronted with the decision of whether to sell an asset, the 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 millionaires are always seen to be acquiring assets (yes I know you’re thinking Ferrari’s and yacht’s but millionaires are almost also astute investors of appreciating assets).
- Growth: You can object all you want and blame the economy, the GFC, the mining boom and/or the housing bubble but history clearly shows property can ultimately do one of two things… it can grow; or it can grow. And the overnight millionaires not only understand this growth, they capitalise on it. Gary Keller and Jay Papasan state in their book ‘The One Thing’ (http://www.the1thing.com/) a 5mm domino will topple a 10mm domino which will topple a 20mm domino and if we continue to follow this progression, the 50th domino will literally span the distance from the earth to the moon. Now that’s profound. This principle of compounding is the reason why growth is favoured by the overnight millionaire’s rather 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.
- Leverage: 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. Now let me ask you a question: 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? Answer: You do! Lets look at this from a different perspective, you put in half the money and yet you are entitled to ALL the profit? Sounds like a good deal to me!
I will go into more depth in future posts but 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.