There are many ways of creating an immense amount of wealth that will lead you to your finical freedom. The big question is which way will bring you there faster, ending up with the largest amount of assets.
Let’s see these 2 stories:
Samantha saved up some money and used it to build wealth.
She bought a residential house in 2010 for $300,000 and rented it for $20,000 per year. Samantha, being the Real Estate maverick she is, somehow managed to double the number of families occupying the residential asset, increasing the rent by $10,000 per annum to $30,000, generating in the process an annual 10% return on her $300,000 original investment.
As a result of the increase in rent, Samantha’s house is now worth $400,000.
On the other hand Christopher also saved up some funds and started investing to generate new wealth. In 2010, Christopher decided to invest $300,000 and buy a piece of ownership in a Canadian company, called Constellation Software trading for 38 Canadian dollars per one share.
At the time Christopher made the investment in Constellation Software, the company had little less than 21.2 million stocks outstanding, with an annual profit of 41.7 million Canadian dollars – belonging to all shareholders holding the stock. At the time, the largest shareholders in the company were the Founder and CEO and a team of highly capable employees who have been doing very well for quite some years before.
By 2015, the very same 21.2 million company stocks outstanding represents a part of an annual profit of 150.6 million Canadian dollars, over 360% growth in after-tax profits.
With that serious appreciation, the asset – company stock – is bid up aggressively and now is trading at 531 Canadian dollars for each stock – which is 1400% growth.
What happened here?
Well, in both cases, the underlying assets grew their cash streams, which in turn, pushed up the price the next buyer was willing to pay for the same asset.
Understanding this well, Samantha is thinking about increasing her cash flow from the residential house by renting the space under the kitchen sink to some guy looking for storage space or opening a nuclear landfill in the backyard.
Unfortunately, the two families crammed into Samantha’s small home, demand Samantha fix the roof or else they will leave the apartment. Now Samantha has to spend 15 grand on the roof and stop her plans of increasing her cash flows. Her asset has reached its full appreciation scope.
How about Christopher? Well, Christopher embarrassingly does close to nothing – his asset is in very capable hands.
Meanwhile, Samantha is drowning in expenses; real estate agent costs, legal fees, escrow costs and any profits remaining end up in the hands of the taxman with his 15% haircut, even though each and every rent payment has been taxed in full like clockwork.
Now Samantha needs to start the process all over again, trying to find another transaction to keep the wealth generation process moving on.
Christopher’s life is quite different and much better, relative to Samantha’s.
Since Christopher’s asset keeps growing and generates more cash, he doesn’t need to sell. As a result, the tax profits are NOT collected and in itself keeps on working for Christopher, generating future profits that are only taxed when Christopher decides to sell his asset. Unlike Samantha, who has to pay taxes each time a transaction is completed, and this is what makes a huge difference between them in the long-term.