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Before I began my business career, my rich dad insisted that I learn to be a real estate investor. At first, I thought he wanted me to invest in real estate simply for the real estate itself. As the years went on and my base of education grew, I came to better understand the bigger picture of the world of investing.
Rich dad said, “If you want to be a sophisticated investor, you must train your mind to see what your eyes cannot see.”
What my eyes could not see were the legal and tax advantages that real estate investing offers (informed) investors. In other words, there is far more to real estate than land, sticks, and bricks.
Today I make my money from all for asset classes: commodities, businesses, real estate, and paper assets. (And if you like quick-market gains, I have a video you need to see…)
But I hold the bulk of my wealth in real estate. I am able to magnify my wealth using the advantages that real estate offers the sophisticated investor.
There have been challenges for real estate investors in the recent past. But if you learn the ins and outs of real estate investing, you can make money in real estate whether the market is going up, down, or sideways.
That is why my rich dad preferred investing for cash flow instead of capital gains. As long as your property is cash-flow positive, you can ride out a downturn in the real estate market. The flippers and capital-gains buyers who are left holding properties for resale in a plummeting market are the ones who will be hurt the most.
You also need to surround yourself with good advisors. As a real estate investor, you must seek tax and legal advice from professional.
I do not know all of the details of the tax and legal advantages he describes—but I am glad that he, as my advisor, does.
Right Side of the Quadrant
We’re taught to “park” our money. So, it sits there, doing very little but waiting for us to use it.
Most people are on the left side of the Quadrant, working for their money instead of having their money working for them. In that scenario, the bulk of their money pays off bills—liabilities—while only the “leftovers” go into savings or investments. So, most of their money is flowing away from them.
But for the people on the right, the B-I people, their money is working for them. It’s flowing toward them. Their income is passive; their own money, as well as other people’s money, time, and energy, all generate wealth for them.
Does this mean you have to give up your current career or employment? Absolutely not. It simply means that your goal should be to increase your assets—right-sided, dynamic income generators—in order to get your income working for you, and not the other way around.
To me real estate represents freedom. Real estate means control over my life and my future. I am not depending upon a retirement plan filled with stocks, bonds and mutual funds—investments that someone else manages. I want control over my financial destiny.
Cash Flow
When I speak of making money in real estate, I’m speaking of cash flow. This is income coming in every month, regardless of whether I work or not. Achieving sustainable cash flow requires a higher degree of financial education. The good news is you don’t have to go to college to get this education.
Cash flow is realized when you purchase an investment and hold on to it, and every month, quarter, or year that investment returns money to you. Cash-flow investors, unlike capital-gains investors, typically do not want to sell their investments because they want to keep collecting the regular income of cash flow.
If you purchase a stock that pays a dividend, then, as long as you own that stock, it will generate money to you in the form of a dividend.
That is called cash flow. To cash flow in real estate, you could purchase a single-family house and, instead of fixing it up and selling it, you rent it out. Every month you collect the rent and pay the expenses, including the mortgage.
If you bought it at a good price and manage the property well, you will receive a profit or positive cash flow.
The cash-flow investor is not as concerned as the capital-gains investor whether the markets are up one day or down the next. The cash-flow investor is looking at long-term trends and is not affected by short-term market ups and downs.
Capital Gains
When people say their house has appreciated in value, or they flipped a property, they are speaking of capital gains. Capital gains is the game of buying and selling for a profit. You have to keep buying and selling, buying and selling, and buying and selling…or the game and the income stop.
Capital gains occur, for example, when you buy a share of stock for $20. The stock price goes to $30, and you sell it. Your profit is called capital gains.
The same is true with real estate. You buy a single-family house for $100,000. You make some repairs and improvements to the property, and you sell it for $140,000. Your profit is termed capital gains. Any time you sell an asset or investment and make money, your profit is capital gains.
Of course, there are also capital losses. This occurs when you lose money on the sale.
The Advantage of Cash Flow Investing
The best thing about cash flow is that it is money flowing into your pocket on a continual basis whether you’re working or not. It is your money working for you.
And generally, cash-flow investing is based on fundamentals that aren’t as susceptible to market swings like capital-gains investments, which means that even in bad times, money still flows into your pockets.
Additionally, cash flow is what is known as passive income, which is the lowest taxed type of income.
This is not always the case with capital gains taxes, which vary depending on the type of asset you’ve invested in and how long you’ve owned that asset. In some cases, the taxes can be very high.
Regards,
Robert Kiyosaki
Editor, Rich Dad Poor Dad Daily
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