"If You Want To Get Rich...Climb Into A Time Machine"

Tyler Durden's picture

Authored by Charles Hugh Smith via OfTwoMinds blog,

There's a profound difference between assets that produce no income and those that produce net income.

To those of us nutty enough to pore over dozens of pages of data on wealth and income in the U.S., the Federal Reserve's quarterly Z.1 reports and annual Survey of Consumer Finances (SCF) are treasure troves, as are I.R.S. tax and income reports.

Allow me to share a few observations on family wealth and income drawn from my review of these documents:

Changes in U.S. Family Finances from 2013 to 2016 (42 pages)

Financial Accounts of the United States (198 pages)

Corporate profits clock in at $2.135 trillion annually, around 11% of the nation's GDP (gross domestic product). (Page 10 of Z.1) This has changed very little over the past few years; corporate profits totaled $2.140 trillion in 2014.

Most people who follow financial matters closely probably know corporate profits have been around $2 trillion annually for awhile.

But how many know that proprietors' income from small businesses ($1.375 trillion) and rental income of persons--i.e. not corporations--($740 billion) together equal corporate profits? ($2.115 trillion for small biz/rentals, $2.135 trillion for corporate profits.

How many financially savvy people know that proprietors' income and private rental income rose by $189 billion since 2014, while corporate profits flatlined?

Clearly, the families that own the proprietorships and rentals pulling down $2.1 trillion in annual profits are doing a bit better than OK.

As the charts below reveal, most of this profitable business equity is owned by the top 10% of families. There are a few clues that suggest that family-owned business equity is distributed along a power-law curve, i.e. the majority of wealth and income is held by the top and the rest is distributed over the rest of the owners.

On Page 28 of the Survey of Consumer Finances (SCF), we find that the business equity owned by families in the bottom 50% of family incomes has a mean value of $208,000, up marginally from $204,000 in 2010, the business equity held by the top 10% of families rose from $2.265 million in 2010 to $3.3 million in 2016--a gain of over $1 million.

As always, I want to stress the profound difference between assets that produce no income and those that produce net income. This excludes hobby businesses that lose money or tax shelters that are intended to lose money. I'm talking about businesses that generate revenues in excess of all expenses: net profit that is taxable.

Owning a vacation home that is rented out a few weeks a year is one thing, owning a rental property that's rented out 50 weeks a year is considerably different. The first is an expense, the second generates net income.

Somewhat to my surprise, almost 14% of households own some residential property equity other than their primary residence (page 18 of the SCF). Unfortunately, the Fed lumps second homes and vacation properties in with rental properties of up to 4 units, while rentals with 5 or more units are lumped in with farmland and commercial properties in equity in nonresidential property.

Only 6% of households own any equity in nonresidential property, a category of wealth that gained 72% from 2013 to 2016. Interestingly, the percentage of families owning this form of wealth actually declined from 7.2% in 2013 to 6.2% in 2016, suggesting to me that the corporations and hedge funds snapping up multi-unit residential properties are buying properties from families.

Based on my previous surveys of I.R.S. income tax data, much of this small-business equity and family owned-rental property is owned by the top 4% to 5% of families, with the majority owned by the top 10%, as shown in the chart below.

The number of families with business equity has been declining, eroded by recession and stagnation, despite the recent bounce higher.

Most of the biz-equity is owned by the top 10%:

While the financial media focuses on billionaires and hedge fund managers playing for billions, much of the wealth and income of the nation is firmly in the hands of families that own proprietorships and rental properties.

These assets have risen sharply in value, and they've also generated gains in income.

If you want to get rich, you can climb into a time machine, return to 2010 and buy a couple thousand bitcoin for $1 each. Alternatively, you can marry extremely well. If neither of these options is available, then starting a profitable proprietorship that enables the purchase of rental properties is another option.

*  *  *

If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com. Check out both of my new books, Inequality and the Collapse of Privilege ($3.95 Kindle, $8.95 print) and Why Our Status Quo Failed and Is Beyond Reform ($3.95 Kindle, $8.95 print, $5.95 audiobook) For more, please visit the OTM essentials website.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
FreeShitter's picture

Yeah no shit.....I'd like to go back to 09 and buy 10000 worth of BTC

krampus.'s picture

Yeah I remember Max was talking about it in 08. it was like 5 bucks at the time. I didn't know anything about it so I bought gold instead. I still don't know much about it but it kinda feels like the bank itself. I can't touch it I can't hold it so how can it be real? I know that's old school thinking. But like someone said. How you gonna use it if the grid goes down? 

Ignorance is bliss's picture

I think you need some of both Bitcoin and Gold. Gold is not exactly the most tradable asset during a grid down situation. Now lead might have more value given the right circumstance. Point is we really don't know what's coming.

adr's picture

So what you're telling me is to become a slum lord. Buy up rental properties and put in government paid tenants, get rich. 

The best way to get rich is to be rich in the first place. 

thefinn's picture

If you took the number of immigrants pouring into the US off the GDP you'd be in a depression.

 

ProTip: You're in a depression.

If the mums and dads are piling into the market, be sure that the smart money is likely already out.

roddy6667's picture

Rental properties have always been a good way to acquire wealth. First of all, you don't buy cash, you put 10 or 20% down and finance the rest. The tenants make youir payment. For example on a $100,000 property, if you put 20% down and the property appreciated 10% in 3 years, you make 10% on the whole property, not just your investment. All other things being equal, you made 50% over 3 years, or almost 17% APR on the price alone. Also, your income is sheltered by repairs, maintenance, and other expenses. You get to claim depreciation as if the house is losing value every year when it is gaining value. This also boosts the APR. 

When you need cash, just use the property like an ATM. Take out a second mortgage or refinance.

Landlording can be a pain in the ass, but don't think of the property the same way you do your own home. 

Arnold's picture

Yeah, we are looking at all the trial balloons being floated for change in the Tax Laws.

Being able to offset income by mortgage and tax deductions is a biggie, I feel will not change because all the high end slumlords, although set up differently, rely on these same ownership costs.

Plus, it had better be structured right, you cannot have stable rentals with service costs passed through to a diminishing pool of qualified renters. In other words, you cannot simply raise the rent to cover your fuckups, or the governance fuckups by changing where the goalposts are set.

The last big blow up I had was when Reagan removed revolving credit deduction.
Everything got eventually paid off,and I have lived a long, full life since.
Didn't seem to be a possible future back then.

brushhog's picture

Ive got mine paid off. No mortgage. In my area it was hard to get rent to cover mortgage, taxes, insurance, and maintainence costs. The bank was getting it all and then some. Appreciation not really keeping pace. Rentals bring me in a nice modest supplimental income after expenses. Nothing too big. We are definitely not anywhere NEAR the top 5 or even 10%.

Drop-Hammer's picture

Time machine?  You will have to go back to the Middle Ages, serfs, and noble lords to reflect what we have today.  Except that we Gentiles are the serfs and the Christ-killers are the noble lords.

Drop-Hammer's picture

In this day and age of broke-dick/indebted municipalities trying to get in the black on the backs of property-owners, and white Americans (never rent to non-Caucasians) who have no steady jobs/income, rentals are a bad idea.  Sell them, bank the cash, and live your life only in cash.  There is no such thing as 'assets' anymore in this land of Jew Debt and chicanery.  Two words-  Get the f*ck out of jew debt.  

Golden Showers's picture

I've been shredding at work. Small business. Watching the money dry up up over the years. Shred shred.

1990 money was fucking insane. Gold was low $400 an ounce. Money was flowing. 27 years ago.

 

JMKeynez's picture

I go with proven analysts. Go by their past record. Shepwave is so far only one accessible to Publix.

Nexus789's picture

Symptomatic of a change to an economy that was in the dim and distant past competitive and made things to trade. It has now evolved to become a rentier economy where a small section of society tapping into debt paracites of the majority. This activity sexes up the GDP figures and creates the illusion of economic growth. 

Tom Green Swedish's picture

Another misleading article. Most businesses that prosper are wildly sucessful, 80 percent fail. Also real estate in certain locations is way overpriced, and its very easy to make money once you have one property, just look for places where rent is way higher than owning. For example you are not going to purchase a property in San Francisco and rent it. You would never make yor money back. Sort of like buying equipment to mine bitcoins now. You would get your ass handed to you.