The Middle-Class Mindset Of The High-Income Earners And The Block To Invest In Real Estate

Andrew Lanoie is a Best Selling Author, Investor and Podcaster at The Impatient Investor, as well as Co-Founder of Four Peaks Partners.

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Real estate is a well-established path to riches. Many self-made millionaires and 38 of the Forbes 400 list of wealthiest Americans have made their fortunes from real estate. Most of these millionaires and billionaires didn’t start their careers in real estate, but through self-education and studying the habits of successful real estate investors, they gravitated toward real estate investing (specifically, commercial real estate) to build, grow and maintain wealth.

Why is it that many high-income earners are able to leap from their jobs into real estate investing to achieve financial bliss but many of their peers remain on the sidelines?

Many high-income earners come from middle-class households that ingrain in them admirable middle-class values like hard work. Still, these same middle-class values may also prevent them from achieving the type of wealth that would allow them to live their best lives. No physician wants to work 70 hours a week and be on call for another 20, but what prevents many of them from taking the steps that other high-income earners have taken to break free of their jobs? The answer is the middle-class mentality.  

Scarcity Mentality

One of the main differences between the middle class and the wealthy is their attitude toward money. Growing up in an environment where the next check could be the last one instilled many high-income earners with a scarcity mentality.

High-income earners with a middle-class mindset view money as something to preserve and protect at all costs. This is where the wealthy diverge sharply from the middle class. At the same time, the middle class view themselves as stewards over and servants to their money, while the rich view their money as the servants and as tools and instruments that can be put to work to build up their personal kingdoms.  

Playing Defense

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The scarcity mentality of the middle class spills over into their investing habits — habits reinforced by tradition, environment, family, society and Wall Street. When the subject of investing comes up, all they hear is diversify, diversify, diversify.

Here is what Warren Buffett thinks about diversification: “Diversification is a protection against ignorance. It makes very little sense for those who know what they’re doing.”

Diversification plays right into the middle-class mindset of scarcity and preservation. If the goal is to minimize the risk of losing money, Wall Street tells you that diversification is the way to do it. Whereas the middle class plays not to lose, the wealthy play to win.

Wall Street Is Not A Friend Of The Middle Class

On Wall Street, diversification is big business. The most significant selling point of mutual funds is diversification and the convenience of 401(k)s invested in mutual funds makes investing simple for high-income earners. Wall Street has a significant stake in keeping the mutual fund gravy train moving.

Check out these mind-numbing mutual fund stats from Statista: 

• Number of mutual funds in the U.S.: 7,636

• Total global net assets of U.S.-registered mutual funds: $23.9 trillion 

• Share of households owning mutual funds in the U.S.:45.7%

• Expense ratio of actively managed equity mutual funds in the U.S.:0.71% 

The numbers that stand out to me? Nearly half (45.7%) of U.S. households own mutual funds, the majority of which are middle class or high-income earners with a middle-class mindset.  

The other number that stood out to me was the average 0.71% expense ratio charged by U.S. mutual funds. The expense ratio is what the mutual funds charge as a percentage of assets under management as a fee to manage the fund. For example, 0.71% of $23.9 trillion is $169.69 billion. That’s what the mutual fund industry makes in a year from taking advantage of the middle-class mentality. 

Do mutual funds earn their keep? Not even close. According to a 2020 report, over a 15-year period, nearly 90% of actively managed investment funds failed to beat the market. Mutual funds are a racket. You’re better off putting your money in an index fund than entrusting your hard-earned cash to mutual fund managers.

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The Hard Work Myth

One of the biggest myths embraced by the middle class is that any money gained from anything other than hard work is ill-gotten gains. So, the thought of passively making money by the sweat of someone else’s brow goes against everything the middle class has been taught, and this is one of the biggest obstacles to high-income earners taking the leap to invest in real estate. The wealthy have no problems with passive income streams. It’s the only way they can overcome the time constraints of punching a clock.  

The middle-class mindset is a strong force built from decades of indoctrination by family, schools, society, corporations and Wall Street. Breaking away from this middle-class mentality that heavily invests in stocks and mutual funds makes only corporations and fund managers rich. Jumping into the lucrative world of real estate investing starts with education — gathering the necessary knowledge to understand the mechanics to evaluate the merits of real estate investing. 

High-income earners who are currently entrenched in the middle-class mindset but are willing to learn about real estate investing will put themselves in the best position to finally be able to flip from a scarcity mindset to one of abundance, swap a defensive investing approach with a more offense-minded one and overcome the hard work myth to break free of Wall Street for the greener pastures of real estate investing.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

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