The Ultimate Guide to the Best Wealth Building Assets (2024)

My mission here atcoachcarson.com is all about helping youbecome wealthy(aka win with money). Money is not the most important thing in life, but losing with moneyhas the pesky issueof keeping youfromdoing the things that DO matter.

So, in that spirit I want to share myguide to the best wealth building assets.

Youhave probablyread or heard aboutRobert Kiyosaki and his uber-famous financial book Rich Dad, Poor Dad. I have some issues with Kiyosaki’s overallup-sell business model, but this book contains a very useful idea for wealth building. Here is how Kiyosakidescribes it:

You must know the difference between an asset and a liability, and buy assets…. Rich people acquire assets. Poor and middle class people acquire liabilities, but they think they are assets.”

Kiyosaki defines an asset as anything that puts money in your pocket. A liability is anything that takes money out of your pocket. The big mistake that poor and middle class people make, according to Kiyosaki, is spending their lives buying liabilities instead of assets. He teaches that if you want to be rich you simply need to spend your life buying assets.

Kiyosaki’s definitions of assets and liabilities arenot technically correct for accounting purposes, but I’ve found the overall concept to be a very useful in training myselfhow to spend and allocate moneyin order to become wealthy.

The rest of this guide will help youdifferentiate between the best and the worst wealth building assets. I’m going to categorize and rank all of the assets as follows:

1. The WORSTAssets for Building Wealth
2. The MEDIOCREAssets for Building Wealth
3. The BEST Assets for Building Wealth

The WORSTAssets forWealth Building

For all of the assets in the Worst category, the common theme is that they consume your money and don’t give any back. Remember that this is the category of purchases where the poor and middle class spend most of their money, and it’s a big reason things don’t change for the better financially.

Sometimes the negative cash flow is simply upfront at the purchase, but more often the money-consumption of these assets continue for years. Both the up front and ongoing costs have a dramatic and negative long-term affect on your wealth building. You can see just how much using these tools:

1. A future value calculator – enter your current purchase amount, an average return like 7%, and 20 years in the future. This calculator will tell you how much you’re giving up in the future by making this purchase.
2. The rules of 752 and 173, which show the enormous opportunitycosts of recurring weekly and monthly purchases, like your car loan payment.

Personal Automobiles

You personal automobiles area liability because they consume cash. You may love the style, the engine may purr, and it may do a great job of hauling the kids around, but in terms of building wealth it is a bad use of your money.

An automobile goes down in value over time, it consumes money formaintenance, and it consumes money withongoing taxes and insurance each year.

Of course, automobiles are necessary to function in your normal life, right? How would you get to work? How would the kids get to soccer practice?

Yes, for most of us (especially in the US) automobiles are necessary. But it’s possible to think outside of the box. Maybe you could get by with fewer cars? Maybe you could get by with fewer nice cars? Maybe you could get by without financing an automobile and just paying cash.

Let’s face it, a $5,000 used car that’s clean, safe, and boring can get you around just as well as a $25,000 new one. But in40 years the person who saved the money and bought the $5,000 car could have a more secure retirement and $43,000 more income per year than the person who bought the $25,000 car. See my full explanationin “How to Retire Rich With Embarrassing Old Cars and Ugly Houses.”

So automobiles are necessary, but if you are maximizing wealth building, it pays to find ways to minimize this unproductive asset.

Boats and Other Big Toys

Boats are like automobiles, only worse. They consume more money and have less practical value. There is no doubt that they can be a lot of fun, but they are a luxury item and a bad investment asset for most of us. Buy them with open eyes.

Vacation Homes

These are often called investment assets, but my observationsbehind the scenes with friends and family show that they are typically not great investments relative to normal rentals. Vacation rentals are often bought at inflated prices, have extremely high expenses to operate, and wear down quickly because of high turnover. This all leads to little, or more likely negative, cash flow on a huge initial investment of your capital.

This article on Zillow.comdoes a great job explaining the reality of vacation rentals as an investment.

My wife and I subscribe to the philosophy of always rentingwhen we traveland just owning our rentals in working-class, bread-and-butter locations back at home. This gives you much more flexibility when traveling, and it makes a lot more sense financially.

Furniture, Fashion, Fine Wine, and Bling

Ifyou’ve forced your spouse to read this against his or her will, they areprobably hating me about now! But just like cars, yourpersonal belongingscan be a necessity or a luxury item depending upon how much you spend.

A second-handsofa will hold you up off the floor justas well as a brand new leather one costing thousands of dollars. One nice coat will keep you warm as well as 3-4 fashionable options. Expensive wine often does nottaste appreciably better than reasonably priced wine. Jewelry looks beautiful and may have sentimental value, but it’s not as good of an investment as other options I’ll share with you.

Please understand that I’m not saying the nicer things aren’t wonderful and a pleasurable part of life. I love them too. I’m just asking you which is more valuable to you, the nice couch, the full wardrobe, the expensive wine, and the fancy jewelry, or the freedom to work (or not work) on your terms for the rest of your life?

That choice is made every day. And like me, you’ll probably make plenty ofpurchases that are notgood investments because they provide non-financial returns that you value. That’s perfectly fine.

But, the main point is that there are alwaysfinancial consequences and conflicting goals with your purchases. Use your knowledge of the negative financial consequences of buying these assetsso that you can honestly evaluate whether you really need them or not.

The MEDIOCREAssets for WealthBuilding

Principal Residence

I was torn about where to place this. Robert Kiyosaki, for example, believes that your home is not a good asset because even when it’s free and clear it takes money out of your pocket in the form of taxes, insurance, and maintenance. Jim Collins, a blogger who I respect, calls owning a principal residence A Terrible Investment.

I don’t disagree with Mr. Kiyosaki or Mr. Collins in most cases. If their points werethe entire story I would place a principalresidence into the category of Worst Assets for Wealth Building. But another way of looking at your residence pulls it up into the mediocre category.

Forthose of you who, like me, are willing to deal with a little discomfort for enormous, tax-optimized profits, your principal residence can be a great asset during your growth years.

The two primary methods to accomplish this are:

1. House Hacking: purchase a small multi-unit building, live in one unit, and rent out the others. I personally did this and lived for free for several years, and then kept the building as a long-term rental. You can use the same concept by renting out spare bedrooms in your house or garage apartments with sites like AirBnB.

I wrote the House Hacking Guide to tell you step by step how to use this tool. I also share the details and numbers of my own house hack.

2. Live-in Flips: Did you know that you the US tax code allows you to make a profit on your residence tax-free every two years? It’s one of the most favorable parts of the tax code, and it can help you use your residence as a wealth-building engine.

I wrote “Live-in Flips: A Plan to Own Your Home Free and Clear in 6 Years” as an explanation of the subject.

I realize these two uses of your residence are not for everyone. That’s ok. It’s a great path, but it’s not necessaryto build wealth.

But do remember that spending too much on your principalresidence can cost you BIG over the years. So keep your housing expenses modest, and invest the savings in better wealth building options like the ones I outline in this article.

Bonds

Bonds arenot something I claim to be an expert on. But these are certainly assets that when done correctly can offer a secure long-term return, less volatility, and a hedge in particular against deflationary periods of our economy.

But, Iput them in the mediocre category primarily because of their low-yields in comparison with potential future inflation. For example, VBTLX, a low-cost Vanguard Mutual fund that owns a large number of bonds, has a current yield of 2.17%. That rate would be lucky to cover the projected inflation rate over the next fewyears.

If you are in a growth phase and don’t need your money for a couple of decades, 2% returns will not help you much. Butdepending upon your age and risk tolerance, holding a largerpercentageof bonds could make sense.

For a decent summary of bonds and how to use them as a regular investor, I refer you to an article on bonds by blogger Jim Collinswho has a nice way of boiling down tough subject to their essence:

Certificate of Deposit (CD) and Money Market Funds

Like bonds, I don’t consider a CD or a money market fund a mediocre investment because it’s not safe. It can be. This investment is mediocre because the returns are not goodrelative to other options.

If you purchase a 5-year CD at 2.05% (the rate I found today, 11/9/2015 at highly ratedState Farm Bank), you will likely not even keep up with the inflation. That is not a recipe for wealth building success.

Inmy world, thebest use for CDs and money market funds is simply a holding placefor reserves. Your situation, depending upon age and risk tolerance, could vary from mine.

Precious Metals,Commodities, and Collectibles

In general, I follow the lead of Warren Buffett and don’t believe assets like gold are a good investment. This is a great article by Buffett about the value ofproductiveassets like farms, businesses, and real estate as opposed tonon-productive assets like gold and many other metals.

Some commodities, such as silver, corn, and others are certainly useful in our economy, but these don’t fit another Buffett investment criteriaof being simple and understandable. If you can figure out and profit from the pattern of commodity prices, more power to you. I know I can’t.

Now, let’s finally get to theBEST assets for building wealth.

The BEST Assets for WealthBuilding

Income Producing Real Estate Properties

Surprised? I love real estate investing for a lot of reasons, but above all else it can be a champion at producing regularcash flow. This cash flow can be used to amortize debt and build wealth. It can also be used to reinvest in other properties so that you create more cash flow. Eventually it can also be used tofund your personal expenses so that you can focus your time on other projects in your life that matter.

My favorite property typeswithin the real estate world are small, residential rentals like houses, small multi-units, and mobile homes. These typesare the most intuitive and easy to manage. With the exception of mobile homes, they also theeasiest real estate to finance, which makes them more liquid at retail prices and easier to sell than larger commercial real estate or land.

Other niches within real estate have merit as well, depending upon your goals and risk tolerance. Farm and timber land has been a very lucrative long-term wealth builder for people I know. Large apartment complexes and other commercial property can also produce huge income and growth. These larger real estate purchases require much more expertise, capital, and risk, so don’t be afraid to stay small andmake it big on little deals.

Want to learn more about investing in real estate? Here are some resources to get your started:

• My newsletter and free real estate toolkit, of course!
• Biggerpockets.com – My regular articles are here, but there is an enormous amount of other excellent, free information on this site.TheUltimate Beginner Guide on this site is a great free resource for newbies.
• Building Wealth One House at a Time, by John Schaub – I recommend this book as the best starting point for real estate investing.

Private Notes Secured by Real Estate

Private notes area cousin of rental real estate investing. Instead of owning the real estate, you are the lender for someone else who owns the real estate.

Private notes area smaller but important part of my own portfolio. Theycan provide a higher ratio of income than most rentals (between 6-15+%), and importantly they’remuch more passive. If you are careful about the loan to value ratio and borrower qualifications, it can also be very safe.

My favorite place to do private notes is inside my IRA or self-directed 401k, where interest income can be received tax-free. This also allows myIRA investments to be more passive.

Privatenotes could fall into several broad categories:

1. Loans to house fix-and-flippers – usually shorter-term (6-12 months) at higher interest rates. I have borrowed plenty of notes this way, but as of yet I have not been the lender. Be careful that the borrower is very competent and ethical, and then make sure the borrower does not getall themoney before the repairs are complete. Until the house is completely repaired, the house does not have its full value and you could lose your loan principal.
2. Loans against stabilized income properties – this type of note is more straight-forward and easier to analyzethan a fix-and-flip. Again, make sure the borrower is competent and ethical, and thenmake sure the loan to value and debt coverage ratios are sufficient.
3. Seller-financed notes to owner occupants – in the past, these have been my favorite form of private note. The monstrous Dodd-Frank federal legislation has complicated these somewhat, so do your homework. But they can still be very stable and profitable investments if done correctly.

I don’t recommend private notes to beginners. Theycan be lucrative, but they require some education and experience with real estate along with some healthy cash reserves for contingencies.If you want to learn more, here are some additional resources I recommend:

• Investing in Debt by Jimmy Napier – This is the first book to read if you want to understand the fundamentals of the time value of money and note investing.
• BiggerPockets.com Forum for Note Investing – ask questions, read old posts, and interact with other new and experienced note investors.
• “Introduction to Note Investing – Why You Should Be the Bank” article by note investor Dave Van Horn on BiggerPockets.com
• “Five Advantages of Note Investing” – another article by Dave Van Horn that gives some benefits of note investing
• Hard Money Lending Seminar – If you have any inclination to lend money on fix-and-flip deals, do yourself a favor and attend this seminar with Dyches Boddiford first. I don’t make any money off of the referral. Dyches is just the best I know at the details of this part of the business.

Stocks of PubliclyTraded Companies

Fora majority of the world’s investors, the stock market is probably the top choice for wealth building because it has proven returns over time and it’s easy and affordable to access.My wealth building engine has primarily been a real estate investing business. But I’ve been slowly moving more into stocks for long-term diversification.

I like stocks because I believe asa whole that the best businesses in the world and their managers will continue to reinvest their capital very well for a long-time into the future. The untapped economic potential in our country and in the world is huge, and most intelligent investors like Warren Buffett agree.

But most stock experts also agree that picking individual companies for investments is a losing game for lay investors like you and me. For that reason, owning a large basket of diversified stocks will probably continue to be the best stock strategy for long term wealth builders.

For a great run down on the benefits of stock investing and in particular a specific approach I like the most calledlow costindex-investing, read the excellent Stock Seriesby blogger and long-time investor Jim Collins at jlcollinsnh.com.

Which Assets Will You Purchase?

Like anything else worthwhile in life, building wealth is not easy. It’s not easy because your life is complex and constantly changing. You must juggle priorities and make decisions with imperfect information every day.

The purpose of this articlewas to make your wealth building choices a little clearer and simpler. I gave you assets ranked according to their ability tobuildwealth, but of course you will have to balance the many priorities within your own life and make your own choices.

If you are hard-core about achieving financial independence quickly, as I have been, you will want to become hard-core in tilting your spending heavily towards the best assets like real estate, private notes, and stocks. To free up cash for those assets, you will want to avoid the worst assets by reducing big expenditures in categories like housing, automobiles, big toys like boats, and personal belongings.

If you think that pattern of life is too much like depravity, you’re probably right in your case. I doubt I could convince you otherwise.

But, if you’re enticed by the freedom, flexibility, and autonomy of winning with moneyand if you’re willing to make a few sacrifices, I can assure you the path is worth it. You might even find, as I have, that life gets even better once you make the so-called sacrifices.

Which assets will youpurchase? Do you agree with how I categorized the best, worst, and mediocre assets?I’d love to hear from you in the comments section below.

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