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Rich Man, Poor Man: How the Rich Get Richer

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The wealthy insist that their money work for them. They utilize their money to make more money. The wealthy want the money they deposit in the bank to draw interest. But they do not view the interest the bank pays as an investment. The same holds true for CDs. CDs are not an investment. To the wealthy, CDs and bank deposits are nothing more than a place where they keep their money until the money can be truly invested in a much more profitable venture.

Wealthy people invest in stocks. They study the stock market and do not depend on hot-tips or touted stocks. Discipline and management are vital aspects of their stock investments. Their risk of loss is low because they buy cheap and sell high, and they accomplish that through sound information and research.

The Money Times, November 2008, reported that rich executives bought the following stocks: Allscripts-Misys, which yielded a 52-week return of 73.1%. Cincinnati Financial, which yielded 25.8% at the end of 52-weeks. Dow Chemical, which provided a 52-week return of 35.2%. Exelixis, which returned 62.9%, and Fortune Brands, which returned 50.4%.

Wealthy people invest in bonds, using the interest from the bonds to purchase luxury items. Which means they never have to touch the principal. Whereas the average person buys a new car, dipping into his principal for the down-payment and paying interest to the finance company.

Wealthy people invest in real estate, the kind of real estate that makes money. Assets such as commercial properties, apartment complexes, and rental houses. They borrow the money to buy the properties, which provide tax deductions. The money collected from tenants pays off the loan. The investor makes a nice profit. For the wealthy person, the mortgage is an asset and not a liability, because the wealthy person uses the mortgage as a financing system to make money, which he uses to buy more real estate.

Of course, with the collapse of the housing bubble, borrowing the money to purchase properties has become more difficult. Mark to market accounting made banks reluctant to make loans because the banks would lose money. Then in early April 2009 the Financial Accounting Standards Board suspended mark to marketing accounting. This maneuver did not change the reality of the situation. Home prices are still too high and wealthy investors know it. So they simply changed tactics.

The wealthy moved into Real Estate Investment Trusts (REIT), which is an easy way to buy real estate in U.S. and foreign markets. REITs are high yield property trusts that provide tax advantages, diversification, liquidity, and zero insurance costs. These property trusts allow wealthy investors to remain in the real estate market, where rents come to them in the form of dividends.

Although REITs are securities that sell like stocks on the major exchanges, when wealthy investors buy property trusts, they are really not in the stock market. They are in the real estate market, because REITs invest in real estate directly, either through properties or mortgages. REITs invest in shopping malls, office buildings, apartments, warehouses, and hotels; specific areas of the real estate market or geographic locations (see WRIT below), such as a specific state or country.

There are different types of REITs. Equity REITs buy and own properties. Revenue comes from property rents. Mortgage REITs invest in and own property mortgages. Revenue comes from interest. Hybrid REITs invest in both properties and mortgages.

What is interesting about REITs is that even in today’s topsy-turvy economic world REITs return 8% to 10% domestically and even higher percentages in foreign markets. For example, on June 30, 2010, Washington Real Estate Investment Trust (WRIT) paid a quarterly dividend of 43 cents per share. WRIT invests in properties in the Washington D.C. area.

By putting their money in REITs, wealthy investors continue to make money in real estate. Their money works for them, especially since many REITs have dividend re-investment plans (DRIPs), which automatically wrap profits back into the REIT.

The rich always find an opportunity to get richer.

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About Randall Radic