Although they don’t call it by that name, what these parents are thinking of is multi-generational wealth. Multi-generational wealth is wealth that outlives the person who created it. The fortune is often built-up in the lifetime of a single outstanding individual. That individual then finds a way to retain the wealth and pass it on to their heirs for many generations.
Why is multi-generational wealth so rare?
Many people make significant money in their lifetime, but for most of them, that money is gone before they retire. A few preserve enough wealth to pass some of it to their children. But 78% of people who inherit wealth from their parents lose it within their lifetime, leaving their children with nothing to inherit.
The number one reason money seldom makes the leap from one generation to another is that the skills required to create wealth are different from the skills needed to keep and transmit that wealth to others. People who make money often assume that their heirs will automatically be able to manage the funds. But most of the time, they are wrong.
Families that build multi-generational wealth often have a strategy that includes two key elements.
- A long-term financial roadmap
The family created a blueprint that outlined its financial goals for several generations, with objectives divided into short-term and long-term needs. The blueprint often includes retirement planning, setting up a fund for children’s education, and building passive income streams to support those needs.
- A portfolio of stable income-generating asset
Assets that can withstand the highs and lows in the economy. Those assets must be able to generate passive income on a steady basis (income that does not require your direct input for its creation). Lastly, there must be a framework for protecting those assets long after the family founder is gone.
How to build multigenerational wealth
Why is real estate the best option for building multi-generational wealth?
· Stable value
Real estate sustains its value for the long term. Real estate remains valuable for decades and often appreciates at a rate surpassing other assets. Even when the value of real estate falls or stagnates, it never loses value completely.
This is unlike stocks, where the asset value can fall to zero if the company ceases to exist. Real estate values may fall in the short term, but land and property prices increase in the long run.
· Tangible need
The simple reason why real estate investments remain valuable across several generations is that there is a real need attached to the asset. All real estate investments are based on land ownership, which will always be in demand.
Also, because land is a finite resource, its value always increases (due to scarcity). Moreover, land can always be repurposed for different use, so it will always be valuable.
· Passive income
Property investors can separate their time and know-how from their ability to make money by appointing property managers to oversee their assets.
· Leverage
Only real estate investing allows investors to control assets worth four times the amount of money they invest. When buying stocks, investors must pay 100% of the value of the assets before they can own them.
But with real estate, an investor can take ownership of an asset after paying just 25% of its value. Real estate investing lets investors grow their wealth faster than using only their money.