Wisdom of Rich Dad

If I want to become rich, then I need to invest in assets that generate passive income. This is what I have learned from reading the Rich Dad’s series by Robert Kiyosaki. One such asset that can generate passive income is real estate. And anyone who can afford to invest real estate will likely to do so. And they will rent their properties out in hope of earning passive income. But a lot of time, they miss out quite a number of costs in their calculation to decide whether they can afford to invest in their properties.

Let imagine that I decide to buy a property that is priced at $200,000 for investment. It does not simply mean that I will be paying $200,000. In fact, I will be paying much more than $200,000. To understand why, there is a need to know more about the type of costs involved.

There are two kinds of costs to look out for when doing any investment, namely fixed and variable costs. Fixed cost means that the cost is fixed. It will not change. Variable cost means that the cost is not fixed and it changes with time. Also, cost can also be classified into one time cost or regular cost. One time cost is something that I need to pay once only. Regular cost is something that I need to pay at regular interval such as once a month. Fixed cost is usually one time cost. Regular cost is usually variable cost.

If I buy a $200,000 property, I will need to pay legal fees to the lawyer to transact the purchase. This is an additional one time fixed cost on top of my purchase price. Another example of one time fixed cost will be the stamp duty fee.

I will also need to pay an accountant to manage and file the income tax for my rental income. This is an additional regular variable cost on top of my purchase price. Another example of regular variable cost will be maintenance fee for my property.

And there are hidden costs too! Hidden costs exist in any kind of investments or businesses. They do not just exist in real estate investment. I am simply using real estate as illustration on hidden costs. Thus, one should always on a look out for hidden costs in any kind of investments.

For example, I need to manage and maintain my own property by investing my time. Thus, time is a hidden cost. Also, I will need to find a valuator to perform a valuation on my property before the bank will loan me the money. When I apply for mortgage loan, there is a need to pay for loan acceptance fee.

As you can see, when the realtor tries to sell me a piece of real estate, he will only present the price of the real estate. He is unlikely to tell me the list of all other costs that is involved in the transaction. Also, he is unlikely to tell me that if I intend to rent the real estate out, what are the additional costs involved. In the end, I will end up spending much more than $200,000 to buy the real estate and rent it out.

Similarly, I can end up spending more money than I intended to when I buy something for personal use! An item that is cheap can be very tempting. But there is always a danger of hidden costs.

For example, I can buy a printer at a very low price. But the original ink cartridges are rather expensive. By buying a few original ink cartridges, I can almost buy a brand new printer. Thus, the hidden cost is the original ink cartridges replacement costs.

If I have noticed the hidden costs, then I am able to do something about my decision. For example, I may buy another printer instead where the cost of replacing original ink cartridge is low. Or I can look for alternatives other than using original ink cartridges. If I can find a good alternative for original ink cartridges, then I will buy that particular cheap printer.

In conclusion, I should always look for all type of costs whether I play the role as an investor or business owner as defined in cashflow quadrant by Robert Kiyosaki. Or I am simply playing the role of a consumer. After identifying all the possible costs, then I will be able to budget the amount of money really needed for the investments or whatever things. I will not be caught in a situation where I am overstretched financially because I have done a good job at budgeting my investment based on the various types of costs.

A lot of us are worried in the global financial crisis that we are all facing. Companies are cutting down their costs. Unemployment rate rises. Economies are entering recession. Many are left homeless and are doing their best to make ends meet.

While this scenario may be a disadvantage for a lot of us, this crisis poses an advantage and a great opportunity for the so-called “VULTURE FUNDS“. It’s a great time to hunt for their food. But what exactly are vulture funds in the first place?

Just like vultures, birds who prey on dead bodies of animals, vulture funds also prey on dead things. They prey on distressed debts and assets of ailing companies experiencing financial turmoil. Sometimes, they are also called special situations fund. The ultimate goal is to buy these distressed debts and assets at a very low bargain prices and profit from it turning trashes into an instant gold.

During the height of the Asian Financial Crisis in 1997, a lot of debts and assets turned sour. A lot of borrowers who availed loans in dollar currency were left with a ballooned principal and interest as an effect of rising mighty dollar against a basket of asian currencies. Because of this, there’s an aggressive increase of non performing assets in the balance sheets of banks which are considered as trashes ready for write down. In order to avoid huge potential losses from these trashes, banks dispose it by selling to vulture funds.

One of the countries hardly hit by the Asian Financial Crisis before was our country Philippines. Non-Performing Loan Ratio (NPL Ratio), the ratio of non performing loans to total loans of banks, reached its peak to as much as 20% on their balance sheets. In order to address this problem, the Congress passed a law in 2002 called Special Purpose Vehicle Act of 2002 (SPV Act of 2002). This particular law gives huge tax incentives to vulture funds buying distressed debts and assets of banks. Six years after the passage of the law, banks now have considerably reduced their NPL ratio to as low as 5% disposing billions of distressed debts and assets to vulture funds set up by leading investment banks such as Deutsche Bank, Lehman Brothers, JP Morgan Chase, Morgan Stanley, Amroc Investments, and Barclays Capital.

On the latest study conducted by Debtwire on Asian Distressed Debt Outlook for 2009 surveyed among 100 hedge funds, China and Indonesia posed the greatest opportunity for distressed debts and assets as an effect of the global financial crisis that we are currently facing.

Truly, vulture funds can easily turn banks’ trashes into gold. But as with any other investments, high returns mean high risks. Detailed due diligence and the right resolution strategy is the key in a successful distressed debts and assets investments. Once again, vulture funds will be on their active hunting season for their preys…

If I want to be rich and wealthy, I need to change my mindset to invest in assets that generate passive income. Becoming rich has nothing to do with how much I earn. This is what I have learned from the book Rich Dad Poor Dad by Robert Kiyosaki. If I had earned a lot and spent on luxury items, I would be simply wasting my opportunity to accumulate wealth. In fact I would loss out to someone who had earned much lesser and invested in assets that generate passive income. In the long run, he would be able to accumulate more wealth than me.

Since it is possible to invest in assets to earn passive income, is it possible to invest in assets that generate passive time?

Before I investigate into details, let us have a common understanding of what is passive time. I define passive time as time gained to accomplish things with little or no human intervention. Just like in the case of passive income, it is earned with little or no human intervention. For example, when I invest in a property to collect rental income, there is little or no work required on my part to earn that rental income.

Based on my definition of passive time, are there assets that generate passive time? To answer this question, let look at the example of a washing machine. As we all know, a washing machine helps to wash clothes. But it helps to generate passive time too!

Firstly, a washing machine will wash the clothes automatically after I have choose the washing option and set it running. This means that I can be doing some other things while the washing machine is washing the clothes. Passive time is earned because the washing machine is washing the clothes automatically. All I need to invest is a little time to choose the washing option and set it running.

Secondly, a washing machine speeds up the washing process. Imagine if I were to manually wash my clothes, I would have to spend much longer time than the washing machine. In this sense, passive time is earned because now I can do the same amount of work in lesser time. All I need to do is to invest some time to choose, buy and install a washing machine.

In other words, an asset such as a washing machine that automates a manual process is considered to be generating passive time. Also, an asset such as a washing machine that improves the efficiency by speeding up the process is considered to generate passive time. Thus, I should be looking for assets with these two features to generate passive time.

Since I already know how to identify an asset that generates passive income, the next step will be on how to select relevant assets to fit into my life so that I can gain passive time. Before that, let me explain what do I mean by relevant asset.

A washing machine is relevant if I use it to wash my clothes. When I use it to wash my clothes, then I am earning passive time. If I do not use the washing machine at all, then it is a liability since it does not earn passive time. Just like if I have a property, I need to rent it out to earn passive income. If I do not rent it out or fail to rent it out, then I do not earn passive income. In this case, the property will be a liability based on my understanding from the book Rich Dad Poor Dad, by Robert Kiyosaki.

To be able to identify relevant assets, the first thing I must do is to identify all the manual processes in my daily life that can be either automated or speed up or both. That is I must keep a time statements just like I need to keep a personal financial statements. A financial statements help to identify how I spend my money. Similarly, a time statements help to identify how I spend my time. In short, a time statement is like a recording of all my daily activities.

I will probably need record all my daily activities for about a few month to identify how I spend my time. Based on the list of activities that I am always doing, I need to filter through the activities and see if I can automate or speed up some of my daily activities by investing in certain assets that generates passive time. In this way, I can identify the relevant assets to invest in.

Why am I focusing so much on learning to invest time? Well, time is one of the two things that are available that I can invest so as to create wealth based on my understanding from the Rich Dad’s Series by Robert Kiyosaki. The other being money. Since I need to have more time to invest so as to create wealth, I need to learn to invest time to gain more passive time!

Introducing the new Robert Kiyosaki Show, with Robert Kiyosaki and Rich Dad Advisors. In this episode, Robert discusses why investing is better than saving for your retirement. Also, special Guest Garrett Sutton, explains why owning your own home can be more risking then you think!

Well guys, I think we still got opportunities creating wealth during economy downturn.
Here are some ideas.

1. Investing real estate. Buy foreclosed properties as the price is at the rock bottom. Having a house/apartment to stay is necessity, tenants (ex-house owners) still need a place to live after being foreclosed. There is still demand for renting property during recession. Robert G. Allen is expert in buying foreclosed properties, please read his famous book ‘Nothing Down’.

2. Buying a business. Slow down sales will hurt business. Find a good prospect business and strike at the right price. Sell off the business when the time is right.

3. Buying undervalue stocks. Find strong fundamental companies and buy their stocks if they are undervalued. Remember Warren Buffet’s advice, buy when people are scare enter the market, sell when people rushing to buy.

4. Buying unit trust/mutual fund. If the 10 years cycle assumption is correct, shares price will rise again. So buy now as almost all are in low price, they might be increase few years later. Advice from Robert Kiyosaki, investment by hoping for capital gain is risky. So, it’s up to you to decide.

5. Investing in precious metals. Precious metals like gold price tend to rise during recession. Same case might happen to current situation, but it is reverse currently due to banks and investors converting gold to USD. But still a lot of analysis suggested us to buy gold.

6. Buying devalued currencies. Currencies like AUD, NZD, SGD, IDR and ISK are dropping their value against USD. Some countries offering high interest rate, eg. Indonesia (10%), Australia (3.5%), Iceland (18%) and Sri Lanka (23%). You can have two types of profit: high interest rate return and potential of that currency to rise against USD. Some bankers offer facilities to deposit your saving into foreign currencies, check them out.

7. Obtain loan from low interest rate countries. Guess what you gonna do with this loan? Of course put into higher return places eg. blue chip stocks with high return or saving in other countries banks offering higher interest rate. Countries offering low interest rate so far are Japan and USA. You gonna have your stable passive income guys.

8. Buy tax lien certificate. You can buy this at most states of USA. I think the chances of house owner late paying tax are higher during recession. You may make a small fortune there.

9. Blogging. Since your workload is less during recession. Find some of free time to blog. You maybe rich because of this. Please helping mine too.

10. Offering loan to needy people. Setup business to serve that purpose. I notice in some countries, the loan given interest rate is more than double of bank interest rate. So these people will get loan from bank and offer loan to needy with higher interest rate. Please consult legal firm before setting up this kinda business.

Don’t panic and think positively, there are still a lot of opportunities to make money during economy downturn. You might become rich during this recession. Who know right?

Final words, try all these at your own risk.

Ever been on a roller coaster? It’s scary to even see it tumbling down from a height, scarier still to be in it. Most people scream, close their eyes tightly shut, with hands tightly clenched over the support beams till their knuckles are white. Some pray and even wonder at their own wisdom of taking a roller coaster ride.

At the end of it, when it comes to a stop, most agree that it was one hell of an exhilarating ride that they had ever experienced. Similar is a stock market. In the middle of the ride, you’ll find lots of faces drained of their life blood—people who seem to be cursing their luck and the guy who had asked them to invest in the stock market. There are others who are throwing up, many who are crying and some who seem to be enjoying it.

If you were to talk to such people from the investment community, you’ll know that they are worried about the turmoil, but have chosen to keep their faith in the markets. They are in it for the long-term. They have chosen investments carefully and are not bothered about the turmoil that is shaking the world at the very foundations.

If there is one person who deserves a prize for sheer guts, it has to be American investor Warren Buffett. He has infused $5 billion into Goldman Sachs and another $3 billion to GE in the past 15 days. It’s not charity either.

Buffett is acknowledged as one of the savviest investors of our time, maybe of all times. He sniffed out a fabulous bargain. He got preferred stock from these companies that pay him a dividend of 10%, with the option of investing in the common stock to the same extent, within five years at a predetermined price.

It’s a win-win deal he has brokered for it is a vote of confidence on the company. Coming from Buffett, it’s like an investment grade rating or better than that as he is actually putting the money compared to rating agencies’ grades. That’s a good deal, isn’t it? Is there no risk at all here for Buffett?

Of course, there is. These companies are still vulnerable. That is the reason they required the cash infusion in the first place. But with Buffett’s backing , they will have access to more funds and have a shot at becoming healthy again. The price that these companies paid was the fat dividend that they had to fork out—a small price to pay if the alternative was to go belly up.

There are others who are scouring the wreckage of the financial markets to get juicy, valuable chunks. There are many bargains available at this point. But the average investor is so scared that he can see only darkness. The treasures are not visible to him. Savvy individuals invest in such turbulent periods as it presents them an opportunity to make extraordinary profits.

It’s not luck which is on their side. They go in search of luck, meet it in the form of opportunities and take intelligent and calculated risks. Without risks, extraordinary returns are not possible. The risk now may actually be lower than when the stock market was at a high, as the chance of the market correcting was more when the index cruised higher and higher.

But investors were more than willing to come in then. Now, when it’s at 50% of the peak, investors have deserted it. The logic being it may go down. Markets could go down from any point. Higher the point, more are the potential chances. Knowing this, does it not make sense coming in strongly at this point and buy aggressively?

Like Tata Consultancy Services (TCS), which bought Citigroup Global Services and also got with it an outsourcing deal of $2.5 billion over a nineand-half year period. Each one can become a savvy investor at this point in time. You don’t have to be a Warren Buffett and buy up companies.

One just needs to pick up small quantities of shares of fundamentally strong companies now and wait for the market to turn. Most investors are acting like the poor dad from Robert Kiyosaki’s book “Rich dad, poor dad”. They are afraid of risks, assailed by fear and ignorance, and don’t have the foresight to take advantage of opportunities and lack the sagacity to take failure in their stride as a learning experience.

Investors need to see this whole turmoil in proper perspective. This is something that started in the US and there is little exposure that we have. There is “collateral damage”, of course. Foreign entities are pulling out from the world-over to cover their losses.

Also, they are ironically pulling out from countries like India as the emerging markets are seen as “more risky”, the problem started and has engulfed the advanced economies, principally! India happens to be a domestically driven, investment-led economy.

This augurs well for us. We could continue to grow as long as we the investors have faith in our own economy. We don’t need an outsider to tell us that there is tremendous growth potential in India, irrespective of what is happening elsewhere. Just see the state of infrastructure and you will know there are opportunities aplenty. We need to conquer the fear and invest now to get an asymmetrically high return in future for this effort.

Fear can be looked as a positive factor too. The saying in a soft drink advertisement is: “we are of course afraid. But we will do it… Because Darr ke aage jeet”. You need not swill any sugar water. Take the darr ke aage jeet line to your heart and just do it!

(Suresh Sadagopan is Chief Financial Planner, Ladder 7 Financial Advisories)