The Millionaire Next Door

Big House; No Cattle

A recently published article in The Wall Street Journal  indicated that nearly 15% of “homeowners” with outstanding mortgage balances of $4M or more were at least 90 days overdue in their payments.  That is nearly twice the rate for all home loans.  In America today there is growing number people of the “big house, no cattle” variety who are facing bankruptcy. 

Hyperconsumption is an economic disease that is prevalent in all socioeconomic strata.  Of these three major economic factors (income, net worth and market value of home) which is the best predictor of consumption?  The market value of one’s home.  Income ranks second; net worth, although significant, ranks third.  The Wall Street Journal article also contained two interesting case studies.  One former Wall Street executive, Mr. RF, recently declared personal bankruptcy.  Just prior to that his house was in foreclosure proceedings.  He attempted to sell his home for $13.9M but had no offers.  This 18,000 square foot home had 11 bathrooms.  From my own research I have discovered that only 6% of decamillionaires live in homes that have 8 or more bathrooms.  The median number is in the 4 range.  Also, in Stop Acting Rich (p. 242),  I mention that the median square feet of the primary home owned by a CEO of a Standard and Poor’s 500 firm was 5,600 or less than one-third of Mr. RF’s home.       

The other case study profiles a Hollywood actor whose $35M home went into foreclosure and reverted to the lender.  Why is it that so many so-called Hollywood “stars” insist on living in such expensive homes?  Do they think that they are wealthy because they have high incomes, live in mansions and believe their own press clippings?  Again, income is not wealth and wealth is not a big mortgage. Many in Hollywood are only acting rich.   

What if you “own” a $35M home? If you do, then you are actually in the real estate business.  And, in this case, the owner of the business (the actor) is out of business!

Contrast this actor with those millionaires in America who list their primary vocation as “owner of a real estate investment company.”  What percentage of their wealth [70% of which is in investment grade real estate] do these people typically generate in terms of annual realized income?  According to my research, the answer is somewhere in the 3% category.  In fact, their objective is to minimize their realized (taxable) income and maximize their unrealized income, i.e. build wealth without a cash flow.  At this rate, how much wealth would they have to have to realize enough income to pay for a $35M home, plus mortgage interest and property taxes?  Even if they had a net worth of over $100M this purchase would require the equivalent of 20 years or more of all their realized pretax income!  This scenario may give you some idea why most professional real estate investors do not live in $35M homes.

5 thoughts on “Big House; No Cattle”

  1. Thanks for the reality check.. usually if the grass is greener on the other side of the fence, it is because somebody painted it.

  2. We believe in America that we have to have it all. A sad comment I heard a few weeks ago from a pastor of a church. That’s the only way to have anything is to be in debt! This was the leader of the church! I am not wealth (yet) but almost debt free. It is a choice and a choice that some weeks you have to remind yourself daily! I do not need that if with a payment. Americans have stuffitis! Do you really need 11 bathrooms!
    What is wealthy!
    Wealthy is first knowing Jesus! Putting him first in your life! Having a family that loves you! Wealthy is having good health & a good job to go to! Those things are things money can’t buy! Wealthy is being able to help others along life’s way! And you can, if you are debt free!!!!!!!!!!!!

  3. They say, “The best way to pass on knowledge is through a good story.”

    This guy named Randy:Y-DNAr was born with a brain. With the help of the village, as he grew up he learned to use it. When he turned 15 yrs old he was kicked out of his parents home when his very religious parents found out he was a gay, atheist, idiot/savant, and Reddit’r and they would not tolerate their son being anything they did not approve of.

    He moved into a cardboard box at the back of a hotel and near a YMCA. He got a minimum wage job at a restaurant and ate where he worked after school. He saved all his money and put himself through university (economics) after graduating from high school.

    I am a “one percenter”. That means I live on less than 1 percent of my yearly income. I have been a “one percenter” all my life. I made $12 million (USA dollars) net income in 2009. I re-invested 99 percent of what I didn’t spend. I pay personal tax on the 1 percent I live on but I pay zero tax on the remaining 99 percent that is re-invested and there is a reason why.

    I started out in life at zero net worth. My net worth has grown exponentially since then.

    Here is the trick I used: Many many years ago I learned the more you make the more you get taxed. A year or two of getting taxed at 46.222 percent woke me up. I hated paying tax on money I was trying to put to work to make more money so I thought about it awhile and came up with a plan.

    I started a company (ABC) in 1967 and hired the poorest people I could find. I had them sign secrecy and confidentiality agreements and then trained them in basic finance. The tax code entitles everyone to earn a certain amount of income tax free. The next dollar earned beyond that is subject to income tax at some rate.

    I agreed to pay my employees their full tax free earned income amount if they agreed to claim the income on their tax return and also agreed to re-invest 99 percent of the total back into the company. They were allowed to keep 1 percent of the money to live on.

    The first years produced next to nothing for them to live on as their 1 percent share amounted to very little but the 99 percent that was re-invested in the company was put to work immediately. Employees were encouraged to work at anything they could find (ie waitress, farmhand, etc) to make money but try to make it under the table because every single dollar earned above the table would now be taxed. It was their choice how they chose to earn what they needed to live on in the early years.

    After about 10 years of investing and re-investing each employees tax free income allotment each year in the company, the 1 percent share was soon big enough that each employee could notice a difference.

    Employees were also slowly trained in the art of frugality. The yearly carrying costs of a McMansion are 10,000 times higher than living in a glorified cardboard box like the one Warren Buffet lives in. Live within your means … far within your means.

    I started out with 1 employee, then there were 2, then there were 4, then there were 8 … etc. We now have 1,000 employees. $12,000,000 net income / 1,000 employees = $12,000 per employee

    As employees reached and surpassed 10 yrs with the company, the percentage they could keep of the income they claimed each year increased by 1 percent per year. ie. at 20 years, each employee could keep 11 percent of the income claimed and it got better as more years passed

    Employees of the company were also trained to USE the knowledge the company taught them to help themselves throughout their lives.


    The above story is based on “trickle up economics” verses “trickle down economics” that failed.

  4. Eleven bathrooms! This is another example of Daves saying, “people buy things they don’t need, with money they dont have, to impress people they don,t even like.

    Thanks Dave for having a degree in DUMB.

  5. Down here in Texas… we describe those folks as “All Hat, No Cattle”… this is derived from the phenomena of the “store-bought cowboy” where a non-cattle raising/non-horse riding male buys a large amount of cowboy gear to wear. He wears this gear to give the impression that he’s a true cowboy (owning or raising livestock), when in fact he’s a poser. All hat, no cattle means just that!

    Great post… i’m just providing some historical color.

    Lance Cashion

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