Making Money from Your Assets Can Happen In One of Four Ways

If you have ever wondered how to get rich from your portfolio of investments, this article explains the four ways you can earn a profit from your assets. Don Carstens, Brand X Pictures, Getty Images

The purpose of investing your money is to make it grow so that you have even more money in the future. But there are several ways to actually make money and, if you have enough time to leave your money alone to compound and manage to avoid major losses, to get rich from your investments.

#1: The first way to get rich is to earn interest income on money you lend

Some investors lend money directly. One of my grandmothers spent years building her savings nest egg and then, a decade or two ago, began to underwrite mortgages to high-risk borrowers directly, secured by the underlying property, at 13% interest. She only operated within a small range of communities and towns with which she had been familiar for more than 70 years. In many cases, she would either sell the promissory notes to banks once payment history had been established or she would get refinanced out of the deal once the buyer was able to qualify for a traditional mortgage. In effect, she was renting her money to people who needed it to buy a home. She controlled her risk and kept a large enough portfolio of these properties that when one of them inevitably went into foreclosure, which happened from time to time, she faced no hardship until the process was completed.

Other investors prefer to invest in bonds issued by municipal governments, corporations, or other entities. These bond issuers than use the money they raise to build factories, schools, hospitals, police stations, expand into new markets, launch advertising campaigns, or whatever other purposes mentioned in the bond offering prospectus. If all goes well, the bond owner receives interest income checks in the mail until the bond matures, at which point the entire principal is repaid and the bond ceases to exist.

#2: The next way to get rich from your investments is to collect cash dividends from businesses you own in whole or part.

When you buy a business, whether you are talking about the corner drug store or a piece of a much larger business, such as a share of stock in Microsoft, you have a chance to earn cash dividends. This money represents part of the profit that the company’s Board of Directors decides to mail out to the owners based upon their total stake in the business. The more equity (ownership) you have and / or the more profit a company makes, the higher your dividends are likely to be. At the time I wrote this article, shares of Pepsi paid a cash dividend of $2.06 per year. If you own 100 shares, that means you would get a check for $206 per year. If you own 10,000 shares, you are going to get a check for $20,600 per year. If you own 1,000,000 shares, you are going to get a check for $2,060,000 per year. These checks normally show up regardless of whether the stock is up or down, making them a significant source of long-term wealth building for patient investors.

#3: The third way to get rich from your investment portfolio is to own a business that grows, have it reinvest the profit, and then sell it at a higher price than you paid.

When you buy an asset at one price and sell it at a higher price, the profit is called a capital gain. It is important that you understand capital gains and cash dividends are not mutually exclusive. Some of the most successful companies in history made their shareholders rich because they both grew in value and provided a stream of earnings paid out to the stockholders. For example, a $10,000 investment in Wal-Mart at the time of its IPO in the 1970’s is worth more than $10,000,000 between reinvested cash dividends and growth in the value of the business as stores rolled out across America.

#4: The fourth way to get rich from your investment portfolio is to own something of value, such as a piece of real estate, and rent it to someone who needs it in exchange for a regular cash payment.

There is a big advantage to making money from this type of investment and it has to do with taxes. At the time this article was published, if you are an ordinary investor, you probably won’t have to pay the 15.3% self-employment taxes on your rental income that a small business owner would have to pay. This means passive income earned from this source might result in more cash staying in your pocket instead of going to the government. I once wrote about a man I know who has a net worth of several million dollars and pays very little taxes as a result of his investment strategies. part of which included buying institutional buildings and renting them.