The Question of Building Wealth vs Income

There are lots of quotes on how life is a journey, not a destination!  My wife and I have always tried to look at it that way and base our decisions on experiences we want to enjoy or passions we want to explore, without always looking at the end result.  I was going through some old photos and came across these, of a business venture we started in 2011.  I don’t really know how it happened, but we became obsessed with flavoured teas.  We enjoyed drinking and sampling different flavours so much that we thought – wouldn’t it be great to open up a trendy tea boutique of our own?

We were excited about the idea of owning our own business and creating something from scratch, so off we went.  We did a bit of research, wrote a business plan, secured a loan and found a space (that is the condensed version of it – in reality it was coming home every night after work and continuing to plug at it till late hours of the night).

It truly was a passion business though  We built and decorated the space from scratch and sampled hundreds of teas to pick the ones that we wanted to stock.

Here are some pictures – even today I am so proud of what we created.  The business didn’t succeed the way we wanted (back to that life is a journey not a destination theory!), and we ended up selling it eventually, but that’s another story all together.  We didn’t create much income – but we created wealth (life wealth or education as I like to call it!).  It was one of the biggest learning experiences for us, and we don’t regret it for a second!

So back to the topic of building wealth vs income.  In real estate, I struggle with this too.  Cash flow vs appreciation vs mortgage pay down.  Flipping vs buy and hold……….

Most people I know think that Flipping is sexy!  All those shows on TV create a lot of hype.  In fact, after one too many episodes of Income Property and Flip That House – that is exactly how I started in real estate.  The unfortunate part was, I had no clue what I was doing – so not only was it completely not fun, I ended up losing a few thousand dollars in the end.  Do I regret it – no way!  It was the first step to getting to where I am today.

I guess where I am going with this is the whole topic of this blog post (wealth vs income).  To me, flipping is a way to generate INCOME – not wealth.  True wealth building comes from buying and holding real estate.

In economics, wealth is the net worth of an individual (measured as assets – liabilities).  Pretty straight forward right.

Now while wealth represents what a person owns, income is what he earns, and it consists of the inflow of cash. In the long run, income creates wealth if it is properly managed. A person may have a huge income, but if he doesn’t save and invest this income, he will not be able to accumulate wealth.

Most of the strategies I employ in real estate are for wealth building purposes (buy and hold good homes in good neighbourhoods).  My tenants pay down my mortgage, my properties appreciate and I usually reinvest any cashflow that I receive – so in other words my money is working hard for me!  And best of all, most of my wealth is not taxed the same way income is!

Every time we buy a property, we ask ourselves “Am I proud of this property” as we want to have long term investments that we can pass on to our children.  We have no intention of selling as real estate is a wealth building tool for us.

Now don’t get me wrong, income is important too!  Income is what affords our standard of living and allows us to indulge in the experiences we value.  We need income in order to survive.  And yes, some strategies in real estate (including short term flipping) can create income provided you are well versed with what you are doing.

So ask yourself – what are you doing to create income and what are you doing to create wealth.  Perhaps I am biased, but there is no other vehicle out there to create long term wealth like real estate!

Until next time……………………….