How to Avoid Real Estate Disasters

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0:39Take home the small stuff that day and get the big stuff shipped fast and free right to your door. Shop the sale July 23rd through 27th at the Wayfair Store at Edens Plaza in Wilmette. Wayfair, every style, every home. This is the Rich Dad Radio Show. The good news and bad news about money. Here's Robert Kiyosaki. Hello, this is Robert Kiyosaki, and I'm very happy, excited, and I'm going to be talking today about real estate right now. You have got to be smarter no matter what you do today because this market is an all-time high. It doesn't mean that I have stopped buying. I'm still buying. My partner, Ken McElroy, and I, we bought a property in Austin, Texas.

1:24It was$31 million. beautiful property but we had to be smarter we had to work harder and the reason we could buy a 31 million dollar property is because Kenny is also a builder so he can take the property take it from 31 million and step it up to 45 million let me say that again bought it for 31 million but our plan is to take it to 45 that's our plan that's how we're going to make our money so it depends upon what skills can you take a property and fix it. So I'm going to show you what I think is the most important thing for right now is this. All of us, Aussie or American or whatever, rich or poor, smart or stupid, male or female, we all have four intelligences.

2:11There's mental, emotional, physical and spiritual intelligence. So in today's so in today's market, with markets at all time high, you've got to be smarter on your four intelligences okay because you've got to get smarter mentally emotionally physically and spiritually so let me explain mentally mentally means you've got to look at the property objectively you've got to look at the numbers just the facts just the facts you know mentally what are the facts what is the rent how much is the how much is stamp duty how How much is this? How much is that? Just the facts. What gets people in trouble is when emotions kick in.

2:55Oh, this is a good deal. Because if you get too excited, or for many people, they're too afraid, and they're afraid of making a mistake, that's a negative emotion here. So get the numbers, keep your emotions in check, and then you take action. So like I said, even though in America the property values are really high and$31 million is a lot of money, we knew that physically we could improve the property and take a value up to maybe about$45 million. We know that, we're not emotional about it, and we can do that here. So those are some of the tricks. And the spiritual part here is this, is what are you investing for?

3:41so one of the reasons i invest in property is because spiritually i don't like paying taxes you know it just bugs me so i use debt and i pay no taxes when i'm investing so those are some of the things i i think about here but spiritually is uh we now own about 8 500 rental properties spiritually we're never going to sell this thing so our plan for our property is we're going to put it into what's called a CRT a charitable remainder trust and we'll package it and all this all of this brain work physical activity and all this goes into a trust and long after Kim and I are gone that trust will still provide cash flow for the people out there you know it'll do a good work for many many people so if you're just in it for the greed that great is more here but this here is a spiritual side of it why are you investing it for you're just going to make money or you're passing on to your children or your grandchildren you know there's got to be some kind of love in this whole thing here so those are very very important things here to remember especially in this marketplace today this is probably the most important of all intelligences when it comes to real estate so let me explain why emotional intelligence is the most important The problem with real estate is this, it's not liquid.

5:14You know, if I buy a stock, let's say Apple computers or Apple, I make a mistake, I can sell it today. You know, I can buy Microsoft and sell it today. But the trouble with real estate is not liquid. You can't sell it if you make a mistake. so if you make a mistake and you bought it up here and it's going down this way you might be writing the titanic down you'll just keep going down with it because you can't get out okay let's say i make a mistake let's say i buy this property let's keep the numbers easy one million dollars and it starts to drop like this have plan b let's say i make a mistake let's say China decides to go bust.

6:05If it starts to go down, what's plan B? So let me say it again. We just bought, we just spent, we just borrowed$31 million. $31 million is a lot of money. The good thing is, it's free money. They just give it to you. If you have a good project, and you have a good mental, emotional, spiritual plan, we showed the banker how we're going to take the property from 31 to about 45. The 45 valuation is dependent upon what, how much rent can we increase. So the good thing about Austin, Texas is possibly one of the hottest real estate property markets in America today. So even though it's very expensive, the good news is people are evacuating Washington State, you know, Seattle, Portland, and California, and their favorite destination is austin texas so the prices went up in austin so we had to go in there and take a look at it and at that moment we found a property for 31 million and our question is can we get it up to a valuation of 45 and the way we're going to get it from 31 to 45 we're going to put improvements in it and increase the rents so we had a plan how to do it and it doesn't make any difference if it's 31 million or 300 ,000.

7:31The plan is always the same. You have got to be smarter. You've got to be smarter here, smarter emotionally, smarter physically, and smarter spiritually. So those are the things I like to talk to you about. Another thing I would like to say is this, have a partner. You want somebody to talk to you. I'm only here because I had a smart wife, Kim. she is really really smart in fact she's 10 most most of my friends say she's 10 times smarter than me when it comes to property and she is she's she loves property this in 1996 my wife kim and i came up with this board game here it's a cash flow board game that's my yellow ferrari out there and this here is what's called the rat race and this is what you go to school for you go to school you get a job, you get stuck in the rat race.

8:24And outside here is called the fast track. In the real world, there really is a fast track. It's called the accredited investor. In America and in most parts of the world, if you are not substantial, you have not enough money or you don't have enough education or experience, you cannot invest out here. So that's why in 1996, Kevin and I created this board game here. and when you go to college or you go to school or you graduate from technical college this is where you get stuck here you go to work go to work just keep paying taxes here so this is 1996 and this is what made our program so different here this is the book rich dad poor dad here this came out in 1997 okay this is called a financial statement now when i go to my banker to borrow 31 million dollars i've got to have a financial statement you know if i go to the bank or say well i don't have a financial statement i have a tax return and i have a bank statement they won't talk to you so the key is my way of saying it here for you to get from here to here requires this here so that's why we created the cash flow board game and and these are some of the differences here there's three parts to multi finance statements all over the world they're always the same there's an income statement it's oftentimes called a p l this is called a balance sheet assets and liabilities and this here is called the statement of cash flow all over the world it's the same now the reason this is important it's this the facts what are the facts so when you look at the facts here and said okay I got this here I got this here this here this here this cash flow so the mistake that people make is they call their house an asset but if you look at the statement of cash flow their home is here and the cash cash flow pattern is going this way in that was every month your money is flowing to the bank but if I buy a rental property this is the difference it flows into my income statement so this is a liability this is an asset so the reason my wife and i are rich is we only focus here one more thing is when you listen to the language of rich people and poor people poor people always talk about how much money am i making and how much are my expenses how much money and how much my expenses the rich are always talking about balance sheet what's on your balance sheet.

11:05So the reason my wife and I created the cash flow board game, this is in 1996, was to take your brain and put it down here. Pop quiz. What's in your kid's lunchbox? At Whole Foods Market, they've already done the studying. Over 300 food ingredients are banned from their shelves. No hydronated fats in the peanut butter and no high fructose corn syrup in the cookies. And for sandwiches, there are no synthetic nitrates or nitrites in any of their deli meat, so you can pack lunch boxes with peace of mind. Get back to school ready at Whole Foods Market. How many of us have been burned in the past by something we put off?

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12:46Again, there's three parts to a financial statement. Income statement, balance sheet, statement of cash flow. So when you're playing this cash flow board game, your hands are moving, doing the math, very simple math. You can add, subtract, and that's all you need. But you've got to know where to put the numbers. So that's where the cash flow board game, you know, it's all over the world. There's cash flow clubs all over the world here. So this is important here. Now, this is the other part about it here. This was book number two in Rich Dad, Poor Dad. It's called the Cash Flow Quadrant. This stands for insider.

13:22People think it stands for investor. No, it stands for insider. Inside investor. He stands for employee. You know, I got a job. i'm a i'm a clerk i'm a banker i'm a you know whatever truck driver or i can be a doctor or lawyer or a computer programmer or something like this self-employed e and s most people go to school to be e's or s's this was my poor dad this is my rich dad here b stands for big business it also stands for brand and generally a brand has 500 employees or more in the tax law of america you have to have 500 employees here and i stands for investor but these guys invest also but most of them invest in shares bonds etfs i don't know what else you call those things they invest from the outside the moment you go into real estate you become an inside investor that's why you've got to be smarter so i only invest inside i own no stocks i own no shares i don't do that because you know because I'm a capitalist I create my own assets out here like not only did I buy property I also started two companies this year so although I have shares their shares of my company because I am an inside investor those are the differences so in 1996 we created the cash flow board game there's a lot of cash flow clubs there there's still cash flow clubs going there and all that but it takes the reason this works is because it's not just mental excuse me to play the cash flow board game requires all four intelligences you see you can know the answer but you still have to do something so you have to fill in the numbers here when you're filling in the numbers and you're erasing and all this stuff your mental emotion and things you're all getting smarter so games are the better teachers because you involve all four intelligence mental physical emotional spiritual so that's why games are the best teachers i learned about investing playing monopoly you know four grain houses one red hotel for our greenhouses one red hotel so when i was a kid and i you know my rich dad had little green houses i was growing up and i would help him with his greenhouses and then in 1969 no 1967 he bought the red hotel that red hotel is still there in waikiki beach it's called the hyatt regency so you have to have a plan also four green houses red hotel rich dad doesn't own the hotel tell he owns the land so rich dad worked as planned so as a young man i understood that and that's why kim and i created the cash flow board game because you'd have to it involves all four intelligences and you can have fun learning most important thing if you lose money it's only paper money that's the most important thing lose lose lose you get smarter but the reason so many people are not rich is because they went to school and they're taught if you make a mistake you get fired or you lose everything here the purpose of the cash flow board game is move your brain over here make mistakes and lose lose lose because you get smarter smarter smarter that's how i got smarter so kim and i created this game in 1996.

17:05so the final thing i want to show you this here this what kim and i do let me show you this here so when i so this here is my sketch of a financial statement income and i'll show you the statement of cash flow balance sheet this is as i got i started my first investment was an eighteen thousand dollar unit in island of maui i wish i'd kept it but back then i was a lot of money eighteen thousand bucks so i i put two hundred dollars it was a two thousand dollars down ten percent down so i put it on my credit card so i bought my first property and since then i just kept investing made a lot of mistakes lost some money made some money but i got smarter so today let me explain how i make my money so let's say i have a business so let's say it's a rich dad business here it's an asset to me and let's say it puts money here income and let's say it's let's keep numbers it's one million dollars if i just keep that money the first line item expense is tax so let me show the tax consequences here if i make a million dollars as an employee i'm going to pay 40 in taxes so 400 000 goes to taxes if i'm a doctor or a lawyer or a small falafel shop owner i make a million dollars i'll pay 60 in taxes so one million dollars here i'm going to pay 600 000 in taxes if i make money here as a rich dad company or a big business i'm going to pay 20 or 200 000 and as a professional inside investor zero so let me tell you how i go from 20 to zero percent here in taxes and this is true all over the world so the way it works is here's one million dollars if i do nothing and let's say i'm an employee they're going to take 400 000 right off the top here so what i do instead as where real estate comes in i borrow four million dollars so i have four million dollars in debt here so i take the property up borrow four that gets my real estate this is real estate here it's now five million let me explain this to you one million borrow four it becomes five million and because it's five million dollars i get to appreciate depreciate and amortize this not that and because this has so many losses to it zero tax but you need a good accountant and all that stuff my uh there's a book called tax-free wealth by tom wheelwright tax-free wealth by tom realwright and my partner ken mcelroy he has three books abc's of real estate investing he has abc's of property management and advanced guide to finance this is the advanced guide so i'm gonna repeat again i make a million dollars here i called kenny up my partner said kenny i need four million that need that means he has to find something that we can borrow four million dollars against and once we have four million it steps up the basis of the property to five million and there are the tax laws and this is true all over the world you appreciate depreciate amortize it zero tax all that money comes into my pocket thank you very much government Okay, so that's the power of financial education.

20:42Keep studying, keep learning, find good partners. And the most important thing is keep your education up and do only business with good, solid, honest people. You're listening to Leaf Filter Radio, and the guru of gutter protection himself, Chris Coonahan, is here to take your most pressing leaf-related questions. Hey, everybody, Chris here. I understand we have Ron on the line. Ron, where are you calling from? Uh-oh. Ron, are you calling from a ladder? Well, I was. I wanted to ask Chris what I need to do to get my gutters ready to have LeafFilter installed. Oh, Ron, you don't have to do anything.

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21:55So I'll leave you with this thing, this saying from my rich dad. Rich dad always said there's a million ways to financial heaven. So if you have financial education, you can find one of the million ways to heaven. You know, this is my way. But there's a billion ways to financial hell. Thank you very much.

22:20This podcast is a presentation of Rich Dad Media Network. When it comes to your roof, don't wait until it's too late. Get a new metal roof today from Erie Home. They're built to withstand up to 120 mile per hour winds and are backed by a 50-year warranty. They're one of the nation's leading residential roofing providers. Schedule your free inspection at eriehome.com slash podcast to receive up to 50 % off installation, up to$1 ,200. That's E-R-I-E home.com slash podcast. Minimum purchase required. Restrictions apply. See rep for warranty or promotional details.