You can either resent successful people—or you can learn from them. Which mindset do you think will help you build wealth?
Despite the prevailing narrative about vapid heiresses and playboy heirs, 70% of billionaires are self-made, according to this year’s Billionaire Ambitions Report by UBS. And when you look at garden-variety millionaires, that number jumps to 79%. Only 11% of millionaires inherited wealth.
But that’s not the most interesting part of the UBS report. To me, the juicy part is how billionaires invest—and how their investments have performed for them.
Billionaire Investing Performance
Over the last decade, billionaires worldwide have grown their wealth by 121%, from $6.3 trillion to $14 trillion.
That handily beats the MSCI ACWI Index of global equities, which grew by 73%. That index represents the overwhelming majority of all equities worldwide, by the way. Over the same time period, the S&P 500 grew by 77%, in case you were curious.
Clearly, these rich people are doing something right. I think you know where this is going.
Billionaires Love Real Estate
You’ve heard it before: Wealthy investors love real estate and have much more of their net worth tied up in it.
In fact, the UBS study found that 43% of billionaires plan to increase their real estate investments over the next year, compared to 19% who plan to reduce it—another 39% plan to keep their real estate allocation roughly the same in the coming year.
Where do they plan to pull that money from? Many billionaires plan to reduce their investments in hedge funds (27%) and funds-of-funds (35%) in the coming year.
But how do the wealthy actually invest in real estate?
The Wealthy Invest Passively
Think billionaires are landlords who own duplexes directly and hassle with tenants, property managers, contractors, and city inspectors?
Hell no. They invest in real estate passively—through private partnerships, private equity syndications, equity funds, debt funds, and private notes.
Don’t take my word for it. Alina Trigub, a former tax advisor and the founder of SAMO Financial, speaks from firsthand experience overseeing her clients’ wealth.
This is how I personally invest in real estate nowadays. I put in my time mucking around with rental properties, renovations, and unreliable renters. I washed my hands of it years ago, and today, I invest while spending most of the year traveling overseas.
Fortunately, you don’t have to be a billionaire (or even a millionaire) to invest passively in real estate. Our Co-Investing Club meets every month to vet a new deal from a different operator, and each member can invest with $5,000 or more if they like the deal. All deals allow non-accredited investors, and we aim for 15%+ returns in the investments we make.
And no, high returns don’t necessarily mean high risk. Investments come with more dimensions than just risk and return—something the wealthy know well. Read up on these other facets of investing to start thinking more three-dimensionally, from liquidity to timeline and beyond.
Downside Risk Protection
Warren Buffett famously said, “The first rule of an investment is don’t lose money. And the second rule of an investment is, don’t forget the first rule. And that’s all the rules there are.”
Other billionaires agree, as do I. In our Co-Investing Club, that starts with diversification across geography, asset classes, operators, and investment timelines. I know better than to try to time the market or pick the next hot city or asset class. Every time I’ve tried to get “clever” or “cute” in my investments, I’ve lost money.
Instead, I practice dollar-cost averaging in my real estate investments—and recommend you do likewise, whether you join our investment club or not.
But diversification alone is just the starting point. As an investment club, we like to see some kind of extra downside risk protection when we vet deals together. That can come in many forms, from extraordinary cash flow to personal guarantees, from wealthy guarantors to tax partnerships with the local municipality. And there are a thousand other ways to protect against losses.
Yes, every investment comes with risk. But you can still find investments offering asymmetric returns, as long as you’re willing to “compromise” on other factors such as liquidity.
Billionaires Fear Inflation
I recently wrote about two of the risks I’m currently trying to protect against: inflation and sustained high interest rates. We intentionally screen for investments in our Co-Investing Club that can withstand both and still come out ahead.
It turns out I’m not the only one worried about those risks. Billionaires named inflation as their second-greatest worry at the moment, after geopolitical instability around the world.
Inflation remains stubbornly untamed and remains a risk under proposed policies from the federal government.
Where Are Billionaires Investing?
Good news for U.S. investors: The UBS study found billionaires most bullish on North America. The overwhelming majority of billionaires see the most opportunity in North America over the next 12 months (80%), and in the next five years (68%).
This is great because it’s a lot easier to invest in U.S. real estate than properties abroad. That goes for both active and passive investments.
To date, our Co-Investing Club has only invested in U.S. real estate. We’re not inherently opposed to overseas real estate—I myself spend 10 months of the year abroad. But we just haven’t found any operators or passive real estate investments overseas that we are comfortable with from a risk standpoint.
The Bottom Line: You Can (and Should) Invest Like a Billionaire
You don’t have to be rich to invest in private equity real estate, private notes, secured debt funds, or private partnerships.
I’m not rich. Depending on how you value my business, SparkRental, I’m not even an accredited investor. Yet I’ve invested in 40 passive investments over the last three years, many with $5,000 apiece (or less).
Beyond the benefits of diversification, investing every month gives you more practice and experience as an investor. Hopping on a call each month to grill an operator about their latest deal builds your expertise—and you get to hear dozens of other experienced investors ask smart questions, too.
Every deal I invest in makes me a sharper investor. I can spot risks today that I would have missed a year or two ago. And by vetting deals together with other investors, we all benefit from each other’s experience.
Billionaires know the power of leaning on others’ expertise to make good investment decisions. And while they might invest $5 million in the same deal I only invest $5,000 in, I still get access to the same returns and tax advantages they do.
It’s an infinitely scalable investment strategy. Already, I’ve occasionally started investing $25,000 or $50,000 at a time. As I build wealth, I can simply ratchet up the amount, even as I continue investing exactly the same way.
Can you say that about single-family rental properties?
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
