Three Paths to Wealth

There are essentially three paths one can take to build wealth. And a great way to understand these paths is through a simple analogy that you may have already heard before in a different context.

Before we continue, it’s important to note that wages may make you rich, but ownership is the only way to build lasting wealth[1]. This will be important to keep in mind as we go through the three basic tiers or methods of building wealth that vary in difficulty, risk, and growth rate.

Equally as important as the paths are the metaphorical cars that drive on them. All cars are built differently, each with different strengths and weaknesses. Some cars can go 200mph on a paved straight road, but can’t corner well and won’t handle bumpy roads well. Meanwhile, another car may be phenomenal on rough terrain for long distances but isn’t as equipt for top speed.

This is a good representation of the entrepreneurship gene pool. Even the most successful people in business aren’t exceptional at everything. If they were, then they wouldn’t need so many experts around them. Learning to leverage your car’s strengths while outsourcing and supplementing its weaknesses will give you the most successful ride for your specific journey.

Now on to the paths.

The first path is a neatly paved road. Many people use this path because they know it’s safe, reliable, mostly predictable, and simply because so many others use it. They know that by taking this road they will achieve their mission of going from point A to point B (from no wealth to wealth) as long as they follow the rules of the road and stay on its path. This path is analogous to building wealth in real estate.

No matter who you are, if you’re willing to spend enough time and effort building wealth in real estate, you can do it. And I don’t mean that in a motivational hoorah way. Seriously, it doesn’t even matter if you don’t have the downpayment saved up for your first property. There are so many tools and methods to get started, and they’re so commonly used and documented online and in books. Anyone with enough time and an inclination to succeed can succeed in real estate.

You could copy someone step by step and still succeed in real estate. Although some people will perform better than others and some may venture into different niches within the industry, overall, real estate is a nicely paved road for anyone to drive on and build wealth with relatively modest difficulty and risk. All it takes is time dedication and determination.

The second path is a dirt road. Dirt roads aren’t pleasant to drive on and that means fewer cars will drive on them. Any car can drive on a paved road, but it takes a certain type of car with a good suspension to survive a long journey on a bumpy, unpredictable road. This path is the territory of small businesses.

When a person’s personal real estate portfolio starts to reach a sizeable number of properties, then it becomes difficult and dangerous to manage everything alone and legally under a person’s name. At this point, the real estate investor must graduate from the infancy phase and into adolescence, where she decides to turn the operation into a business.

When this happens, she brings on technical help, at the least a bookkeeper to help her manage the finances. She might also hire people to help her search for deals, manage her properties, and run errands. Turning your personal real estate portfolio into a small business is just a single example, but a small business can be anything that solves a problem for lots of people and gets paid for it.

This path isn’t as smooth because there are a lot more moving parts in a business than in a personal real estate portfolio. There are a lot more things that can go wrong (or right) during this journey—many more factors at play and more people involved. Each business is different in its own way. If it doesn’t stand out or have a competitive moat, at least in its location of business, then it shouldn’t and won’t exist for long. This makes the journey less homogenized.

Since the path is a lot less traveled, you can’t simply follow the car ahead of you. You need to be more alert and prepared to avoid potholes that the car in front of you may be able to easily drive over, but you will need to elude because your car and your journey is different.

Another important contrast between the two paths is that dirt is more mutable than concrete. It will take millions of cars to drive over a paved road before it changes shape. Even then, the change will be gradual which leaves time for adjustment. Meanwhile, a dirt road can be transformed by a lot fewer cars or a single rainfall (competition or changes in the economy or industry). That makes the path different tomorrow than it was yesterday.

This explains how the “rules for success” in real estate change a lot less frequently and more predictably than in almost any other sector in business. What worked yesterday in real estate will likely work for years to come. In business, the path to success is changing daily. And competition is endured more acutely in business than in real estate. 100 cars driving before me on a concrete path won’t really affect my ability to drive on it. 100 cars in front of me on a dirt road may be a different story[2].

The final path isn’t really a path at all. Picture a 1990 Land Rover Defender in the Serengeti, cutting through the rough terrain with no visible path in sight. To an outsider, it appears like you’re driving directionless. But you know where you want to go, and you’re using the tools and the knowledge at your disposal to take you there.

Using just a compass, the positioning of the sun and stars, and intuition, you know you’re headed in the right direction, but you’ll never be certain until you view your trail in hindsight through your rearview mirrors. As you can imagine, it takes a certain type of car to withstand the treacherous, disorderly conditions of off-roading. There is more risk involved in driving on an untouched path vs a paved or dirt road, so it takes a certain character to want to travel this journey. But there is also an endless upside potential discovery of riches, just as Christopher Columbus did in 1492 voyaging across the Atlantic Ocean to discover the Americas.

This path is analogous to a startup.

Startups are nothing like a paved road, and can’t even be described as dirt paths. To start a startup, you’re entering new territory. Something that hasn’t been done before, somewhere no one has been. A startup exists purely because it is novel and so the path to success is nothing like what anyone else has done; each startup has a unique, untouched path.

Not many people understand startups better than Paul Graham, the investor, and founder of Y Combinator. He has invested in and advised thousands of early-stage technology startups and discovered insights into what makes these enigmatic organizations successful. In one of his essays, he explains the unprecedented nature of startups “Why are founders uncertain about what to do? Partly because startups almost by definition are doing something new, which means no one knows how to do it yet, or in most cases even what ‘it’ is. Partly because startups are so counterintuitive generally.”

A startup, while similar to a small business, does differ in a few ways. A small business is a small organization of about 3-150 employees working to provide a bonafide solution to the marketplace. They likely started as one person and grew to where they are now.

A startup is less established; The idea may or may not even work. Meanwhile, the small business already has a product-market fit. A startup is more of an idea that is still testing the waters. It may be in business and earning revenue like a small business, but it’s providing a new technology to the market and we’re not yet sure how useful it is.

The progression of a startup is often 0-100 while a small business is 1, 2, 3, 4, 5… The startup takes an idea and tries to turn that idea into a successful business while a small business starts with a working product and gradually scales up. While a small business dips its toe in and carefully enters the water, a startup runs and jumps off the cliff and hopes to land in the water.

It’s important to note that no journey is better than another. Also, not everyone is cut out for each type of journey, in the same way, not every car can and should drive on every type of surface. And that’s okay. Wealth is for everyone, but not everyone needs to start a business to achieve it. Consistently increasing your equity in quality assets will get you to the destination.

Have the self-awareness to understand your strengths and weaknesses, to realize your goals and what you want to achieve in life. This will help you understand what type of car you are, and the right path for you to take.

[1] Wages are directly tied to your time and your input and they cannot be passed down through generations. On contrary, ownership isn’t tied to your time or your input and it does not grow linearly. Ownership can be passed down through generations and can theoretically yield profits in perpetuity.

[2] Netflix was the king that revolutionized streaming until Disney, HBO, Paramount, etc., came along. Facebook was the king until Tiktok came along. But in real estate, no single investor can become so big that it makes it too difficult for others to succeed. Prices may go up, but there will always be good real estate deals if you have a shrewd eye and a good trigger finger.