How to Build Generational Wealth with Real Estate

Joe Torre, RealWealth Investment Counselor

Joe Torre

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When it comes to building generational wealth, real estate is an ideal investment. With wide-ranging benefits like appreciation, tax deductions, and principal paydown, real estate investing helps you generate wealth you can pass down to your heirs. With any investment strategy, you need to have a solid plan. Below, I’ll outline how to build generational wealth with real estate, covering the three “pillars” of generational wealth-building.

Table of Contents

What is Generational Wealth?

Investopedia defines generational wealth like this:

“Generational wealth refers to financial assets passed by one generation of a family to another. In some cases, assets are transferred after death in the form of an inheritance. In others, they are passed to the next generation while the giver is still alive.”

That last part—passed to the next generation while the giver is still alive—is an important distinction we’ll return to later.

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Why is Generational Wealth Planning Important?

Many of us dream of building generational wealth for our families. But when it comes to finances, our mindset about money can get in the way. A 20-year study found that 70% of wealthy families lose their fortune by the second generation, and 90% lose it by the third generation.

Whatever the original source of wealth was, it can dwindle over time. Family-owned businesses can close for good, and stocks can go down—sometimes even to zero. The skills needed to build wealth are not the same skills required to maintain it and pass it on to the next generation.

To build lasting generational wealth, you’ll need to have your assets invested in things that are stable over long periods of time, like real estate. With real estate, you have a tangible asset that generates ongoing cash flow and appreciates over time. Below, I’ll share how to build generational wealth with the three pillars as a guide.

An image of an adult hand giving a house key to a child with the text 3 Pillars of Generational Wealth Building.

The Three Pillars of Generational Wealth-Building

1. Building Wealth

The two major wealth-building vehicles are stocks and real estate. While there’s a place for both in your investment portfolio, real estate gives you advantages that no other asset class offers. Here are three:

  • Leverage

Leverage is the first advantage. If you have $100,000 to invest, you can purchase $100,000 worth of stocks or $400,000 worth of real estate (with a 25% down payment). 

For example, investing in a $400,000 investment property that appreciates at 6% a year earns an additional value of $24,000 yearly, increasing to $424,000 that first year. This outperforms $100,000, which appreciates at 6%, rises by $6,000 annually, and earns $106,000 in the first year. 

You’ve spent the same amount, but with leverage, in this case, in the form of borrowed capital or mortgage debt, you’ve increased the potential return due to rising home values. In short, real estate enables you to take advantage of leverage you don’t get with other assets. 

To learn more about this topic, read our article, “The Power of Leverage in Real Estate and How to Use It?”

  • Principal Paydown

The second is the principal paydown. In the example above, you, the investor, took out $300,000 in debt to purchase a property, but it’s not your debt, as it will be paid down by your tenants every month. 

One way to visualize it is that the $300,000 debt isn’t on your balance sheet – it’s on your tenant’s balance sheet because that’s who will pay it off. All you have to do is come up with the down payment and your tenants will pay the rest over time.

  • Appreciation

Investing in markets with job and population growth (think Dallas, Texas, or Indianapolis, Indiana) increases the demand for housing, causing rents and property values to rise. Understanding market trends and property valuation methods is essential when considering how to build generational wealth with real estate and optimizing your strategy.

To illustrate the power of appreciation, consider the “10 -10” plan, which consists of buying 10 houses in a growth market and waiting 10 years.

For example, a $250,000 house in some markets where population and job growth are strong could be worth $350,000 within 10 years. That adds $100,000 to your net worth. If you bought 10 such houses and waited 10 years, your net worth would increase by a million dollars. In addition, you’ll be paid while you wait, with positive cash flow and principal paydown from your tenants. 

Watch this video with Kathy Fettke about calculating your net worth to learn more about why it matters. 

2. Minimizing Taxes

The second “pillar” of generational wealth is minimizing taxes, and here, real estate has additional advantages.

First, let’s begin with a more traditional investment vehicle: stocks. Unless they are held within an Individual Retirement Account (IRA), dividend income is subject to income taxes, and capital gains are subject to capital gains tax. 

With real estate, rental income is largely sheltered from taxes through deductions, both mortgage interest deductions and depreciation deductions. Even though your property appreciates in value, you can write it off as if it was depreciating

Similarly, capital gains are sheltered 100% if you do a 1031 exchange, which is a means of using the equity in your current property as a down payment on a new property without paying taxes upon sale. Utilizing these advantages can optimize the process of building generational wealth with real estate.

If you’re unfamiliar with this method of deferring capital gains, watch our educational webinar on 1031 exchanges here. (You must be a member to watch. It’s free to join!)

A middle aged couple talk with an estate planning advisor and learn how to build generational wealth with real estate.

3. Estate Planning

The final “pillar” of generational wealth is good estate planning. This process determines how your assets will be preserved, managed, and distributed after death or in the event you become incapacitated, and includes:

  • Making a will
  • Setting up trusts
  • Naming an executor and beneficiaries
  • Setting up funeral arrangements.

Estate planning is essential to ensure as much of your wealth as possible passes to your heirs and that they are protected from a time-consuming and costly probate process. 

For more information, please refer to our ultimate estate planning guide for wealth preservation.

RealWealth Resources

RealWealth is an education company and not a law firm, so RealWealth is not allowed to give legal advice. That said, we have two very capable law firms within our ecosystem that can help you with estate planning. You can find them in our investor portal on the “Resources” tab under “Asset Protection.

These two firms specialize in asset protection, tax planning and estate planning. They have been thoroughly vetted by RealWealth and are highly recommended.

A happy young couple with keys to their new house.

How to Build Generational Wealth With Real Estate by Timing Your Transfer of Wealth

I’ll close with one final consideration about the timing of your wealth transfer. 

As we noted at the beginning, wealth is often transferred after death but can also be given while you’re still alive. When you think about it, that’s when your heirs need the most help, especially when they’re in their 20s.

Most 22-year-olds have just graduated from college and have student loans to pay off with little employment or credit history. They’ll probably wind up renting for 10 years before they can save enough money for a down payment and have good enough credit to qualify for a home loan. Unfortunately, these 10 years are a wasted decade financially.

This is where real estate shines. If you put a $50,000 down payment on a $250,000 home for your offspring’s primary residence, they could build a solid credit history by paying off a mortgage instead of paying rent. Plus, they’ll build home equity and capitalize on their home’s appreciation.

To help put this into perspective, let’s use the 6% yearly appreciation value example. If they purchased a home for $250,000 after 10 years, it would have an appreciated value of $447,711! 

Hence, that $50,000 inheritance at 22 is in many ways more valuable than a $250,000 inheritance at age 52. By this age, your children will be well-established in their careers. They’ll most likely have paid off student loan debt and have jobs, mortgages, and a credit history. They can’t get back the years they could have capitalized on real estate’s compounding effect.

Giving them a leg up in their 20s gives them a serious advantage. When considering how to build generational wealth with real estate and strategizing your inheritance gifting, don’t just think about how much you’ll give, but also when to gift it for maximum impact.

How RealWealth Can Help You Build Generational Wealth

When deciding on an investment strategy, look beyond how to get rich and think about what asset class is most likely to keep you and your heirs rich. You’ll be hard-pressed to find anything that is even close to the reliable returns of generating wealth through real estate.

To see if real estate investing is right for you, sign up for a free RealWealth membership. You’ll have access to over 900 educational videos and articles that can answer most of your questions, including how to build generational wealth with real estate. If you’d like to investigate this further, you can even speak to an experienced Investment Counselor, like me, who can show you what a real estate portfolio would look like for your wealth plan.

Joe Torre, RealWealth Investment Counselor
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