Investing in real estate can be a great way to generate wealth, but it isn’t for everyone. For one, the term ‘‘passive income’’ really does not describe real estate investing accurately.
Becoming an investor is a much more hands-on process than just buying a house and renting it out. All the maintenance and potential issues with tenants will become your responsibility. And if you want to grow your portfolio to multiple properties, the responsibilities will grow exponentially.
The time and effort required simply isn’t realistic for someone who already has a full-time job, for example, or existing family commitments. On the other hand, some people would like to invest in real estate but just don’t have the cash.
Does this mean you have to give up on your dream of financial independence? No—there are other options that can help you generate substantial wealth, some of which don’t require you to be nearly as involved as real estate investing.
In a December episode of our podcast, Scott Trench and Mindy Jensen named the top five ways to get rich without investing in real estate. Here’s a look at each one.
1. Index Funds
Obviously, one form of investing or another had to make this list. As Mindy points out, ‘‘When people think investing, they typically think of two schools of thought: real estate or stock market.’’
There are many different types of stock market investing, but investing in index funds is often recommended to the average or beginner investor. Why? You’re basically investing in the economy as a whole on the assumption that it will perform well over time. This is usually a less risky strategy than investing in just one segment of the economy or a single industry or product.
Scott admits he’s ‘‘a big index fund investor” and has faith in the U.S. economy, which keeps growing and evolving thanks to the continuous introduction of new technologies such as the internet and artificial intelligence (AI). These make the economy more productive in the long term, and Scott thinks it’s ‘‘a very reasonable long-term assumption’’ that an index fund investor will get a 7% to 10% annualized return.
Mindy adds that she, too, is a big index fund investor but tends to pick more ‘‘tech-heavy’’ indices. She also has VTSAX shares, which come with greater risk, ‘‘but also there’s a greater chance of reward.’’
Ultimately, the great thing about index fund investing is that it’s almost totally passive. And you don’t have to have a lot of cash to invest. You can put in as little or as much as you can afford—it’s completely up to you and your current financial capabilities.
The downside? Index fund investing is a long-term game. You can sell at any time, but Scott warns investors against it: ‘‘I believe you should invest for a very long period of time.’’
In fact, both podcast hosts agree with Warren Buffett’s statement that his favorite holding time for investments is “forever.’’ The best mechanism here is repeatedly reinvesting the dividends you get, as this will yield you much higher returns over the years.
And when is index fund investing not for you? According to Scott, it’s all about belief. If you think that the U.S. economy actually will shrink over time, with less GDP and less productivity across the economy, you may not feel so confident putting your money in the stock market.
2. 401(k)s and IRAs
401(k) and IRA investing is another way of saying that you’re investing in retirement accounts. 401(k) plans involve paying into pre-tax retirement funds, whereas the IRA method involves post-tax accounts and is more suitable for people with incomes under $100,000.
If you’re going down the 401(k) route, you can contribute up to $23,000 for the 2024 tax year. The money comes out of your paycheck before taxes, also called a tax-deferred contribution.
You will only pay tax on your investment when it comes to withdrawing dividends. You can withdraw early, preretirement, but this will come with a penalty. Employers can contribute to 401(k)s, but they’re also available to the self-employed.
Investing in 401(k)s can be ‘‘a super-powerful tool” for wealth building, as Scott explains: ‘‘If you take that $23,000 that you can invest in 2024, for example, and you get an 8% return by investing in things like stock market index funds, what we just talked about, you get to a million-dollar balance in that 401(k) in under 20 years.’’
The other option is the IRA route or paying into an individual retirement account. It has lower contribution limits: $6,500 in 2023 and $7,000 in 2024 ($8,000 if you’re 50 or older).
3. Job-Hopping
There’s another super-effective way to improve your financial prospects, and it doesn’t require you to invest in anything other than advancing your own career. And the best way to do that these days is to switch jobs.
The days when sticking with the same employer for decades yielded substantial promotions, and well-rewarded seniority are gone for most of us. Mindy points to a very important reality of the current job market: ‘‘There’s more money in the hiring budget for most companies than there is in the retention budget.’’
As an employee, you’re always in the strongest position when negotiating your salary before starting a new job. In 2022, 49% of job hoppers got inflation-beating raises, as opposed to only 42% of those who stuck with their employer.
And if this makes you feel like you’re somehow being disloyal to your employer, don’t worry: Job-hopping is very normal now. As of January 2022, the average amount of time a U.S. employee stays with any one employer was just over four years.
Scott and Mindy advise focusing on adding value to your resume with each new job, whether through upskilling or taking on new responsibilities. You then stay in your current job so long as your new skills (and added value) are being appropriately rewarded. Once you’ve plateaued at your current company, it’s perfectly fine to move on.
Scott does offer a word of caution about counting potential bonuses when job-hopping. Sure, a job may promise you $90,000, where 50% of that is a bonus, but you need to be able to afford the risk of not getting the bonus. If you’re living paycheck to paycheck, you need to concentrate on jobs that may offer you lower salaries, but the income is steady.
4. Boring Businesses
Doesn’t sound too attractive, right? Actually, boring businesses are some of the most lucrative investment opportunities around. What do we mean by boring businesses? Scott gives a few examples: HVAC companies, dry cleaners, small trucking businesses, sanitation and plumbing businesses, and even asphalt paving businesses.
Why are these unglamorous ventures some of the best ways to generate wealth? There are several reasons. One is that these types of businesses are surprisingly lucrative—they can generate $300,000 to as much as $750,000 a year. Given that a business typically sells for twice the amount of its annual cash flow, you could easily get $600,000 or more when it comes to selling the business and then reinvest that money into, for example, real estate.
One thing potential investors will need to remember is that businesses are a lot of work—‘‘this will probably be a full-time job for at least six months to a year, maybe several years,’’ says Scott. Your job as an investor will involve systematizing and modernizing the businesses, as well as improving marketing strategies and reputation building.
Remember, a lot of these businesses are owned by baby boomers and don’t even have websites, so “[there’s] tons of opportunity in this space and not enough competition from buyers at this point,” emphasizes Scott. This is definitely a less competitive investment space than real estate, but it can give you a great leg up to real estate investing in the future.
You also will need substantial amounts of cash to buy even a tiny business—in the hundreds of thousands. However, you may need a bit less if you manage to get a business association loan or seller financing to help you.
If you’re interested but daunted by having to navigate an industry you know nothing about, consider buying a franchise. This type of business investing gives you a playbook, as it were, Scott explains. You don’t need to know as much about the ins and outs of running the business because the template is already there.
5. Side Hustles
Finally, the wealth-generating possibilities of side hustles should not be underestimated. These come with varying degrees of hands-on work and responsibility. Incomes also vary a great deal, depending on product and location, from $25,000 to as much as $100,000.
Mindy recommends being mindful of ‘‘the location, the community needs, and the business viability.” That statistic about 90% of small businesses failing in the first year? It’s ‘‘not completely accurate, but it’s not completely inaccurate,’’ Mindy says.
You need a plan and a buyer for your product, so do your research and make sure what you can offer will find demand. Scott also makes an important point about being honest with yourself about just how passive your side hustle will be. If you end up spending all your free time basically actively producing something for your new business, it may not make sense financially.
Ideally, a side hustle should eventually take on its own momentum without you needing to put a ton of time and effort into it. ‘‘I think people fall into the trap of their side hustle not being as lucrative per hour as their day job in many cases,’’ warns Scott.
And if you do fail? Try something else. In fact, most successful side hustlers try out a few things before they strike proverbial gold. Keep trying—just choose wisely, and choose something that could one day allow you to quit your day job instead of having to work two jobs indefinitely.
Final Thoughts
This is by no means an exhaustive list of ways to build wealth without investing in real estate. As Scott and Mindy admit, there are a ton of other ways, cryptocurrency and horse breeding among them.
The point is to choose something you’re interested in and comfortable pursuing over a period of at least a few years. Remember: Most successful investing requires patience; some of it requires dedication and hands-on work.
Who knows? It could even land you in an alternative career one day, so why not give it a try?
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
