How Real Estate Investors Use Tax Laws to Build Wealth

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0:38They don't know how to make money when the markets crash. So that's really the key importance, I think, for financial education because there is going to be a crash. And are you prepared and can you take advantage of it? This is the Rich Dad Radio Show. The good news and bad news about money. Here's Robert Kiyosaki.

0:57Ken McElroy:Hello, hello, hello. Rich Dad Radio Show, the good news and bad news about taxes. Any comments, Kim? Yeah, well, I like these series and because we, as you just mentioned, there's the four asset classes. There's business, real estate, paper assets, stocks, bonds, mutual funds, and commodities, gold, silver, Bitcoin, oil, gas, things like that. And we always say that, you know, you got to find the asset that fits you best. So we always recommend, And go look at all the different asset classes, see what one fits you best. And then the next sub, the next piece of it is taxes, because everything is taxed differently, depending on how you buy.

1:32Real estate can be taxed different ways, depending how you buy and when you sell. Same as paper assets, same as commodities. We've got two great experts, and you'll know now why they are our Rich Dad Advisors, because they do advise us and they advise us well. And they take us, they take us far in the, you're going to hold up your quadrant. they take us far in the B quadrant, as well as the I investor quadrant. B is for big business, I is for investor. And that's where we all like to play.

2:00Ken McElroy:For entrepreneurs, big business, we have brands and I is we do most of our money in real estate. And then we save gold, silver, Bitcoin, and other commodities. One last thing I wanna say this because Jim Rickards brought it up the other day. He says the most misused word is diversify. You know, when a financial planner tells you diversify, they really are saying de-worsify. So you'll say, well, yeah, I'm diversified. I have oil, I have gold, I have real estate, but they're all in paper assets. And there's a difference between paper assets and real gold, real silver, real real estate, and real businesses.

2:41Ken McElroy:So a stock is not a real business. It's a share of a business. It's a derivative of a business. So when these effin financial planners tell you, you diversified, they're lying to you. Just because you have a paper asset and one of them doesn't mean you're diversified. And that's what Rickerts was saying. He said, and especially given in these times and where we're going in the future, he said the best assets to be in today, this was according to Rickerts, Jim Rickerts, was real estate, gold, silver. He doesn't like Bitcoin. I like Bitcoin. But anyway. Anyway, with that, we've had Tom introduce, Kenny, introduce yourself please to the gang here.

3:19Ken McElroy:And you know, Kenny is our go-to guy because without him, we wouldn't have made so much money. So it's a combination of Tom and Kenny. You can't do this on, well at least I can't. So Kenny, give us an introduction about yourself and how you make us millions and millions and millions and millions in real estate using debt. Sure. Thanks, Robert. Well, as you guys might know, I wrote the books or the Rich Dad series, the ABCs of Real Estate Investing and the Advanced Guide and the Property Management book. But primarily what I do is invest in real estate. So we have multifamily, we have self-storage, we have office, we do land development.

4:01And that's what I do full time. As you know, Robert and Kim, I think why wouldn't you use other people's money? That's basically what it is. It's borrowing money from a bank. People put their deposits in the bank and then they give them to me to invest in property. And so it's the greatest thing ever. And then we only have to come up with the down payments. And so we use debt. And then Tom works his miracles on the depreciation side and the bonus depreciation and all the other advantages that we get on the tax side. So we make millions and millions of dollars every year. And we pay very little taxes and sometimes none.

4:40And to your point, Robert, about you can't do this on your own. When we met Kenny, we were doing it on our own. And I was basically handling all the properties and we didn't have a lot at that time. We had two apartment, three apartment buildings and some single families. And I couldn't handle anymore because I took up all my time. And so when we met Kenny, I'm like, oh, yeah, can you manage my properties? And he said, no. He said, I cannot. So we only work with like 120 units or more. And that's when the team came together. Because as I was doing it on my own, I could only go this far. And I know a lot of people that are in real estate that can't go farther because their time is all they've got.

5:22So you've got to bring a team on. So we had Kenny and then we brought on Tom and it's the team that lets us grow.

5:28Ken McElroy:Yeah, this is a very important There's most real estate investors are here. You know, they have a duplex or a fourplex and then property management gets them. Yes. And so what Kenny said to Kenny nearly broke her heart. Kenny said,

5:45Ken McElroy:Kim was so proud. I have a 30 unit apartment house. Kenny says, it's too small.

5:54Ken McElroy:Not that you can't do the same tax laws, but Kenny can't manage it because in real estate, unlike stocks, see the reason stocks are good, our paper's good, there's no management. But real estate is management and Kenny comes from the management style. So when Kim and I met him 20 years ago, he was like godsend to us. This guy can manage property. And unless you've been in real estate, you don't know that is the Megillah. If you can manage real estate, you got it, right, Kenny? Yeah. In fact, even when somebody is giving you money, it doesn't matter who, that's the number one question they ask.

6:34Who's your team? How are you going to manage it? Who's going to manage it? Who are they? What's their experience? And so it's the most important thing because giving somebody, handing somebody money is not that hard, but then having that money produce is hard. So Kenny, how did you get started?

6:51Ken McElroy:I mean, you started as a management guy, right? Yeah, I did. I started, you know, I was in college, you know, trying to, you know, not rack up a lot of student debt, even though I had some. And I was managing a property and I was getting paid a whopping$600 a month. And I was and I got a free one bedroom and I was managing an apartment building in downtown Seattle. And I liked it. I actually really liked the business. And I felt like it was really horribly managed when I moved in. And I was like, well, if I just get people in here that can pay rent and I can clean this place up, it'll be a lot less work for me.

7:27And I did that. And then the owner came over about three months later and he's like, hey, thanks for cleaning this place up. And, you know, income's up. Place looks great. And I was like, I need to be on that side of the desk somehow. So that's when I started to had my mind shift is like, okay, how do I, how do I buy these and then apply these same management principles? And as you know, I've been in the management business. We still have a management company. I really, really, really love the business. And, but there is a lot more fun to it than that, actually. You know, when you take somebody's money and you invest it, it's fun, I think, because now there's a way, okay, how do we create, how do we make this money, make more money?

8:10Ken McElroy:And the reason that Ken and I always talk about this, this is a financial statement, okay? So you have income expense, asset liability. For the people on the B and the I side, the biggest liability is cash. Yes. Am I correct, Tom? Absolutely. It doesn't produce anything. No, they're printing it. They're printing it since 1971, they've been printing it. So what happens is when Kim and I make money, income comes in here and we have cash, we've got to move it into debt. We're converting cash into debt as fast as we can. But the key is Kenny's property management and then investor management and market management.

9:00Ken McElroy:So that's why anybody saving cash today and living debt-free, it's good advice if you want to be poor. Correct. Now, but don't switch into real estate unless you're willing to understand what Kenny knows about real estate. So that's why his three books, give us your three books again, Kenny. The ABCs of real estate investing, the ABCs of property management, and then we have an advanced guide to real estate investing. And that's what you need to understand because when you say move your money into debt, if you don't know what you're doing and you're buying a property and you have no education, you have no experience, you don't know what you're doing, that debt's gonna be bad debt.

9:38Ken McElroy:And I remember you have a dad, Kim, her dad was hardcore stock guy. He was hardcore buy, hold and pray in the stock market. And that worked for him. But I told him we're buying real estate. He says, I refuse to fix toilets. Well, so do I. That was my plan. I was gonna have dad was gonna be a business partner. My dad was gonna be my business partner on this property. And I called him and I said, what do you think about buying this little single family house? Well, I don't wanna fix property and I don't want tenants calling me at this time of day. And I don't wanna fix leaky roofs And I'm like, I don't think I wanna do this like this.

10:11I said, I don't think you do either. Thank you very much.

10:13Ken McElroy:So just remember, paper assets are for some people, commodities, stock, I mean, gold, silver, oil, for some people, businesses are for some people and real estate is the best. Because right now the problem with Kim and I, our income is going up. And if Kenny doesn't find us a property pretty soon, we're gonna pay taxes. So Tom, would you explain that psychology? because this is on the B and the I side. And because Tom, when we talk about taxes, Tom always says, can you find another property? Can you find another property? Can you get more debt? Yeah. Right. So, so you have to start with the premise, of course, as we've said on the other episodes, that the tax law is a series of incentives to do what the government wants done.

10:57And one of the things the government wants done is they want housing built. Okay. And they want commercial property built. So what they do is they say, well, we'll give you a tax benefit so that you're willing to go and risk your money, put in the effort and the time to go get, and actually, and to borrow money as well, because the government, of course, wants you to borrow money because that increases the amount of cash in the economy. And so it's all good for the economy. So what happens is that the benefit that they give is what's called the primary benefits, what's called depreciation. And depreciation is magic, okay?

11:33Because while your property is going up in value and you're increasing your rents, you're actually getting a deduction for more than what you paid because you get a deduction not only for the amount of money you put in, but you get a deduction for the amount of money the bank put in. So the debt is important, you know, from a return standpoint, but it's also important from a tax standpoint. So critical that you understand debt, if you're going to get into real estate and get the tax savings that you guys talk about.

12:05Ken McElroy:So let me show you in a picture. Okay. So let's say Kim and I have a million dollars coming in from our businesses. It's a liability to us because they're printing more money today. So I want to take this million dollars over here. I want to give it to Kenny. He's going to amp it up to 10 million. And exactly as you said, because the government wants you to borrow money because the dollar became debt in 1971 when Nixon took the dollar off the gold standard, they dropped the interest rates because they want you to borrow money. If they don't want you to borrow money, they'll raise interest rates.

12:38Ken McElroy:It's fairly that simple. So let's say it goes to 1 million here to 10 million here. What that does is reduce taxes here. Is that correct, Tom? Right, because that$1 million is not just a liability because they're printing it, but it's a liability because there's$400 ,000 of taxes associated with that million dollars of income. And really, one of the best ways to get rid of that$400 ,000 tax liability is to take that money and convert it into real estate, because then the government gives you this big deduction for your money, for the bank's money, and it offsets that million dollars of taxable income, your taxes go away.

13:19Ken McElroy:So, that's why, you know, Kenny hears a panic in our voices all the time. Kenny, have you found another property yet? Because if he doesn't find any property, Tom is going to make me pay taxes. Is that correct, Tom? The IRS is going to make you pay. And just to be clear, this formula is not just a U.S. formula. This formula is worldwide, correct? It is. The U.S. right now has the best tax laws in the world when it comes to real estate. There's no question. But every country allows depreciation on investment real estate. So what do you have to say? Because this is why we're always calling you. We have too much cash.

13:59Ken McElroy:You've got to provide this for us so we can go into debt here and we can reduce taxes. Does that fit your psychology, your belief system? Oh, yeah. I mean, Tom always says it perfectly. in my opinion, he says, if you want to see what the IRS wants, just look at their codes. And what the IRS wants us to do is invest in housing, period. And that's why we get the benefits from it. So we invest that money, we get the debt from the bank, and which is we're beating inflation. And then with depreciation and other things, we're actually able to take that money out tax-free. So we're getting income. So we're investing our money.

14:45We're getting our income tax-free. And if it's a value add deal, which you guys have been involved in a lot of with us, you know, then you actually get your money back. And then we have, of course, what we call infinite return, which is you've now gotten your money back and you paid no tax and that's a cash out refi. So you don't pay any tax on that and you still get income. So you give me money, I give it back and you pay tax legally, you know, over that depreciation amount only.

15:14Ken McElroy:So what I just said, so this$10 million property do, it's throwing income here, cashflow. Let's say it goes up to 20 million. What Kenny's talking about is we borrow out a gain and that comes to us tax-free, but that's now tax-free money. So we go from 10 million to 20 million due to inflation or what you want to call it. Well, I call that forced equity. So I buy a property of 10 million with the idea of bringing it to 20 before I buy it. That's the value add, yes. I already know how I'm going to do it. It's not just market driven, you know, we're actually doing things to make it worth 20. Yeah, so when Kenny pitches the deal to us, we already know, we're going to put a million here, is going to go to 10, is going to go to 20.

16:06Ken McElroy:We're already getting income from the property. When the property goes to 20, we borrow out the 10 tax-free. Is that correct, Tom? Well, that's right. And then you borrow out the 10, but then you reinvest that 10 into new property because you've got to constantly be investing in real estate. That's why I'm always after you guys, look, you're making money. We need to constantly be reinvesting that money into real estate. and that's really how this system works. Now, real estate, let me say one last thing on the importance of real estate from a tax standpoint. It is one of the few places where you can actually reduce your taxes today and never pay taxes in the future.

16:49Now, you've got to have the right financial education. You've got to have the right tax advice, but you can literally eliminate your taxes from your business today and never pay tax on the income from the real estate in the future, even when you sell the real estate. I mean, it's unbelievable the tax benefits in real estate.

17:08Ken McElroy:They don't teach you this in school, but they'll tell you put your money in a 401k, which to me is a loser's game, but it's better than nothing. And don't do this at home if you don't know anything about real estate because property management is the hardest part of this game. So when we come back, we'll be going more into why real estate is, in my opinion, the best income, especially if you don't want to pay taxes. We'll be right back.

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20:29Ken McElroy:Welcome back, Robert Kiyosaki, the Rich Dad Radio Show, the good news and bad news about taxes and why the rich don't pay any taxes legally and why the small employee and the small business owner pays the most taxes. Any comments, Kim? Well, yes, and as I've said before, you know, taxes are so misunderstood and everybody thinks taxes are evil. but as Ken and as Tom were saying, that taxes are an incentive for doing what the government doesn't want to do. So they're giving us tax breaks to do what the government doesn't want to do, create housing, create office buildings, things like that. And borrow money.

21:03And borrow money.

21:04Ken McElroy:And for those of you listening who can't see this, that's why we have cashflow clubs or the cashflow game, because you can't learn this stuff by thinking about it anyway. The beauty of a cashflow game is you have to do it, be and do it. And if you don't want to do it, then buy a 401k and pray. I mean, that's really where it's about. So our guests today are again, our tax advisor, Tom Realwright and our real estate partner, Ken McElroy, because we may, Ken has made us wealthier over and over and over again. In 2008, when the market crashed, we all thought we would die and went to heaven because the real estate prices dropped, but so did interest rates.

21:45Ken McElroy:And so as soon as the market market real estate dropped and interest rates drop, Kenny says, I'm gonna borrow 300 million. And when Kenny builds into his business plan that he's gonna take that three, whatever the, how to, he's gonna make the property more valuable and we're gonna borrow out the equity. We don't have to flip the property. So we borrow out the equity. Again, we don't pay any taxes. Any comments on that Tom? Well, yeah, for sure. I mean, first of all, the reason you don't pay tax when you borrow money is because that money is still owed to somebody. And so it's not income to you.