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The first three steps to building wealth are all about simplicity.
- John, who runs the personal finance blog ESI Money, has spent the past few years interviewing millionaires.
- He found that building wealth involves a four-step process: Growing income, controlling spending, investing in index funds, and finding additional investment sources - namely, real estate.
- The first three steps are all about simplicity, whereas investing in real estate requires more complexity - but the financial advantages are worth it, according to real estate investors.
At the end of the day, building wealth is relatively simple: Earn good money, save, and invest.
But there's a fourth, additional step millionaires often take once that's all said and done: Investing in real estate.
"Investing in real estate seems like a natural result once the basics are covered and excess cash is generated," John, who retired early at the age of 52 with a $3 million net worth and writes personal finance blog ESI Money, wrote in a blog post.
John would know - he spent the past few years interviewing 100 millionaires. Here, he breaks down the four-step process many of the millionaires he spoke with used to build wealth:
- "Person/couple begins with normal job, then works to grow income and/or advance, generating additional, strong career income.
- While doing this they keep their spending under control, creating an ever-widening financial gap between what they make and what they spend.
- They invest in index funds to add even more growth to their finances.
- As this cycle continues and feeds itself, they look for additional sources of investment and real estate seems a natural fit for this extra cash."
The first three steps involve tried and true principles to becoming a millionaire.
Most millionaires are goal-oriented and hard workers - they commit to increasing their skill set to build wealth for a long-term plan, according to author Chris Hogan, who studied 10,000 millionaires. This leads to the strong career income John spoke of.
They also have enough perseverance to avoid "lifestyle creep" - the tendency to spend more whenever one earns more. By spending below their means, millionaires are able to commit to saving that well-earned income, which is the heart of building any wealth.
William D. Danko, the coauthor of the best-seller "The Millionaire Next Door," recently said in a Q&A with The Washington Post, that you should create a lifestyle off of 80% of your income and save the remaining 20%.
Read more: Most people believe 6 myths about millionaires, and it can keep them from building their own wealth
A portion of this 20% goes to millionaires' favored investing strategy: Low-cost index funds, which are rcommended by experts like legendary investor Warren Buffett for their minimal risk and cheap costs.
It's then that millionaires can begin to move beyond simplicity and look for additional investment opportunities like real estate.
Seasoned investors build wealth through real estate
"It's an interesting result since real estate is not known to fit the other investment criteria millionaires prefer (simple, easy, etc.) but there's certainly something about it that draws them," wrote John.
Just ask Dana Bull, a realtor and real-estate investor based in Massachusetts. After becoming a landlord in her early 20s when she bought a condo and rented it out for extra income, she now owns more than a dozen rentals - and thinks that real estate is one of the best ways to build wealth.
"What I love about real estate is that you can build your own strategy," she wrote in a post for Business Insider. "My bread and butter has been purchasing small multifamilies with two to four units per building. This is a great entry-level strategy, especially for those looking to live in one apartment while renting out the rest to offset a mortgage."
The financial advantages of investing in real estate are plentiful, according to Bull: Positive cash flow, appreciation in terms of housing values, leverage, and tax advantages.
But the reward doesn't come without the effort, she says. Like building wealth, investing in real estate takes patience and hard work.