Wisdom of Rich Dad

The Rich Dad Real Estate Summit 2009

• September 12-13, 2009
• Scottsdale Plaza Resort – Scottsdale, Arizona

How to find and analyze great investment opportunities in this economic climate.

Great investments are made when you buy…not sell. This is the time to be buying. To achieve success in real estate you have to know how to find great investments, analyze, finance, and manage property. That kind of knowledge isn’t inherent – it has to be learned. Develop your inner real estate genius at the Rich Dad Annual Real Estate Summit.

Regardless of whether you are an expert or just beginning in real estate, this event is for you. This event is exclusively designed for investors looking for long-term, positive cash flow.

Earn more and desire less. These are the words that have utmost importance when you want to achieve financial freedom. No matter how small your income is, if you desire less, definitely you will spend less and you can consider yourself to be “wealthy”.

I believe our lifestyle determines whether we will be wealthy and financially free. There are a lot of persons out there who earns a lot but still because of their high lifestyle, however how huge their income is, all are spent and nothing is put into savings.

I always say to some people whom I know that despite their huge earnings, they cannot save to remember the saying in Filipino: “Ubos ubos biyaya, bukas ay nakatunganga”. You might be lucky earning that huge income now but how sure you are that you will continuously receive it for the rest of your life? Life is full of uncertainties. Therefore, you must take advantage of that huge earnings. There are very few people who might be rich forever. There are few Paris Hilton, Tiger Woods, Ayala Zobel, Henry Sy, etc.

I remembered during the financial planning seminar I conducted in our office, there was one person who asked me: “How can I save if there are a lot of bills to pay and other expenses and my income is not enough to support these? I just answered the four words – EARN MORE and DESIRE LESS.

Earn more from its very essence means to have another source of income. You may take a second job, take a part-time job, or transfer to a job with a higher pay. But the great secret of the rich according to Robert Kiyosaki is not to earn more from active income but to earn more from passive income. For those of you who are new to these words, active income is you work for money and passive income is your money working for you. I wrote an article about active vs. passive income.

But shifting from active income to passive income requires hard work. There is no other way to go to passive income directly except if you are born rich or inherited wealth. So for most of us, we need to educate ourselves about financial intelligence especially the cash flow patterns of the poor, middle class and rich persons. Remember that for the poor and middle class, they always buy liabilities that they think are assets so all their income eventually goes to expenses while the rich only buy assets that will provide them enough passive income in the future.

It’s always us who are making our own destiny. So you choose. It’s your decision. Remember to always watch your thoughts, for they become words. Watch your words, for they become actions. Watch your actions, for they become habits. Watch your habits, for they become character. And watch your character, for it becomes your destiny.

On the other hand, desire less means “downsizing” your needs and wants and prioritizing your needs more than your wants. As you analyze your needs and wants, consider downsizing them. Do your own housework instead of employing a maid or a house helper. Keep food to the simplest and least costly but still nutritious. Lessen those eating out habits. By choosing a good but more reasonably priced school, you can cut on education costs.

Check all your assets. Chances are you can sell some of them and perhaps even reduce your maintenance expenses. Do with one TV set instead of two. Sell your car and take public transportation. Move to a smaller place to reduce you rent and the need for some of your stuff. Sell your jewelry. Downgrade your mobile phone. Unless you are a complete beggar in the street, you can do something about downsizing.

Lastly, why do we need financial freedom? If you are not yet convinced why you need financial freedom, then ponder and ask yourself the following questions:

“Will you be willing to work for the rest of your life?

“Who gets rich in the end if you keep on working: Is it you? Is it your boss? Or is it the shareholders of the company?”

“Did you ever notice that as your pay increases as you work your way to climb that corporate ladder, your income taxes increases too?”

“Did you hear stories of some top executives who committed suicide or risked their health because of too much stress they faced from their jobs?”

“Did you hear stories of children whose lives were misled because of the lack of guidance from their parents who didn’t have enough time for them because of work?”

So do you want to achieve financial freedom? Then just remember the four powerful words – EARN MORE and DESIRE LESS.

~ Kim Kiyosaki

As my mind ran through all the mistakes I’ve made over the years, two thoughts came into my head.

First, I don’t consider a mistake something bad or something I wish I hadn’t done. A mistake, to me, is simply an action I took that did not have the outcome I intended. Every mistake I make teaches me something I didn’t know. Human beings are designed to learn from mistakes. The more mistakes I make, the smarter I become.

So even when I lose money on an investment, that loss tells me there’s something I need to learn. People who avoid making mistakes stay stuck, even trapped, by what they know. They rarely venture into untested waters and don’t learn anything new.

Second, I found that my mistakes–where the actual results didn’t match my intended results–fell into two main categories: 1. when I lost money or 2. when I lost a good deal.

These cases all had something in common. The mistake was not losing the money or losing the deal. That was the result. What was more important was what caused the result. That’s where the real mistake–plus the lesson–lies.

It turns out that every memorable and costly faux pas I made was the result of the same simple but powerful failing: My biggest investment mistakes occurred at times when . . . I did not trust my gut.

It was those times when I doubted myself: when something sounded so good it had to be true (that’s also known as greed) or when I allowed the so-called experts to talk me out of it.

Not trusting your gut, also known as not following your intuition, can last just a moment. It’s when you see or feel something, as subtle as it might be, and you ignore it.

“No, I must have heard him wrong.”

“I’m sure this case is the exception.”

“But all my friends have invested in this. They must know something.”

My “mistakes” occurred when I didn’t listen to the warning signals going off, and that’s when I got into trouble.

It may be as simple as a gut feeling that says, “Sell those ABC stock shares now.” Then the broker talks you out of it . . . and the shares go downhill. I’ve done that one.

Or when I knew, from one snapshot moment, that I should walk away from a deal because my gut was screaming “No, no, no!” I went through with it because the returns being reported were better than anything I had seen–and I wanted those returns. Here’s the story that goes along with that scenario:

My husband Robert and I met a man who owned a hedge fund while we were attending a stock-trading seminar. Several knowledgeable investors we knew were investing with him and telling us about the incredible returns they were getting. We were interested. So interested, in fact, that we made a special trip to his firm’s offices in Florida to conduct our due diligence on the company.

This man claimed to have designed a unique and confidential trading system that was the core of his success. He had just refurbished and moved into plush offices. I made a mental note of the high overhead he was paying monthly. What we heard and saw did not set off any alarms. That night he and some members of his executive team took us out to dinner at an upscale steakhouse.

This man had made a strong point of telling us what a good Christian man he was. Now I don’t care whether a person is Christian, Jewish, Buddhist, Muslim or Hindu. However, I’m a strong believer in practicing what you preach; if this man goes out of his way to share his religious principles with me, then I expect him to act in a way that is congruent with those principles. Not the case here.

During dinner, and after a bit of wine, this man and his cohorts turned into the most obnoxious, rude, womanizing and embarrassing people I had ever been around. Diners near our table were getting up and walking out. At that point I knew in my gut that, at least on the “Christian” level, this man did not practice what he preached. And my instincts raised the red flag: “Where else is he not practicing what he preaches?” That was the moment I should have walked away.

The next morning I had convinced myself that maybe this was just a fluke. Maybe this man was just letting off some steam. “Can I really judge a person’s character from one incident?” I asked myself.

Why didn’t I trust my gut? Greed. The returns on his investments were far beyond the average. People I spoke with who were investing with him sang his praises. I could certainly overlook this one flaw if it meant I’d make a lot of money, I rationalized.

So Robert and I invested money with this man. The statements we received showed beautiful returns–on paper. We were about to invest more money into the hedge fund when Robert brought home a copy of a well-known investment newspaper. On the front cover was our friend, Mr. Hedge Fund, sitting on the beach with the headline, “Would You Trust This Man With Your Money?”

At first I was shocked, and then I began defending the guy. “It’s probably a disgruntled employee wanting to get even,” I thought.

In fact, this man conned his investors out of millions of dollars that he spent on everything from a new house to a new boat. He’s in prison, and investors may get about 10 percent of their money back.

The lesson for me was this: Had I trusted my gut at that defining moment at dinner when I knew something was not as it should have been, I would have saved myself money, distress and frustration.

Mistakes are truly mistakes only when you cover them up and pretend they didn’t happen; if you do that, you learn nothing. And in that case, you’ve just wasted a perfectly good mistake.

The Australian Government provides a money-management site that is useful to people around the world. Understanding Money encourages readers to adopt a three-point approach to their finances:

1. Prepare a budget plan - work out how much you earn and what you spend it on, to help you see where you could make changes.
2. Set some financial goals - they don’t have to be big, but they’ll help you see what you could gain by being better with your money.
3. Get into the savings habit - once you’ve set some goals, try to save regularly and as much as you can to meet your goals.

Understanding Money includes a free, downloadable budget planner in Excel format; a financial health check with links to financial literacy resources; and a free, downloadable money handbook in PDF format. Though some of the details (such as the types of retirement programs) are Australia-specific, the concepts are applicable to anyone, anywhere.

Cherie Kerr wants out of her home. The 65-year-old comedian and public speaking coach paid $590,000 for a 1,150-square-foot Los Angeles condo two and a half years ago–only to find the construction so flimsy that her upstairs neighbor woke her up by dropping a coin on the wooden floor.

“A defect hell,” fumes Kerr of her newly built abode. She has moved back into a suburban home she still owns and would love to unload the apartment, but housing values have fallen so far that she figures such a move would lock in a $200,000 loss.

The good news is that Kerr is anything but stuck. A real estate agent recently informed her that the condo can fetch $3,300 a month in rent. That’s enough to cover her mortgage and property taxes. So Kerr has decided to lease out her condo until values rebound. While she no longer harbors visions of becoming rich off the downtown L.A. property, things could be a lot worse.

“It’ll be a tax writeoff,” she says.

Kerr has lots of company these days. No less a financier (and former do-it-yourself tax preparer) than Treasury Secretary Timothy Geithner is leasing out his Mamaroneck, N.Y. home after failing to get for it a bid he was willing to accept. If you’re one of the horde suffering real estate buyer’s remorse, you too may be able to turn a modest profit renting out your albatross of a residence. How can that be? Thank the trove of tax breaks for residential landlords.

The first step in figuring out whether renting makes sense is to find out how much your place is worth. A professional appraisal is best, but written statements from a few Realtors will do as long as they agree on the value and stipulate how much is attributable to land and how much to the building. (The appraisal, as you’ll see later, is essential for two separate tax calculations.)

The next step is to see how much the property will fetch in monthly rent and weigh that against the costs and tax consequences. As a landlord, you can’t claim mortgage interest as an itemized deduction on Schedule A of your tax return. Instead, you deduct interest costs, plus property taxes, monthly condo fees, insurance and anything you pay to a property manager (most charge 10% of rent) against rental income on Schedule E. You can also expense travel and other costs you personally incur to look after the property.

The other big tax deduction for landlords is depreciation. The tax code allows you to divide the value of your building (but not the land) by 27.5 and to claim the result as an annual depreciation expense. Here’s the first place that the current appraisal comes in. When you convert to a rental, your depreciation is based on the cost of the property plus improvements or its market value at the time of conversion–whichever is less.

In Kerr’s case she must use the $390,000 fair market value of her condo, not the $590,000 she paid. Assuming that 10% of the $390,000 is attributable to land under her building, the depreciation expense comes to $12,764 annually (and reduces her cost basis by the same amount). Add in Kerr’s other expenses and the total is likely to exceed her $39,600 gross annual rental revenue. Almost any residential landlord with a mortgage is going to be in that boat.

The amount by which expenses exceed rent is a tax loss that can be used to shelter up to $25,000 in other income–say, from your salary–if your adjusted gross income is $100,000 or less. (The same cutoff applies to both singles and couples.) Above $100,000 the break is phased out, and it disappears completely at $150,000.

“It’s the one and only time you get to use a passive loss to shelter active income,” says Sacramento tax attorney Roni L. Deutch.

If you happen to be a real estate professional–defined as someone spending at least 750 hours a year, and at least 50% of his working time, in the business–then your career managing property becomes an “active” one and your losses are fully deductible against other income. If you fail the income test or to qualify as a pro, your rental losses don’t go entirely to waste. The net loss gets carried forward and deducted if and when you dispose of the loser real estate or you have gains from passive investments. These gains could be from selling the property in question at a capital gain or from owning other passive investments, like oil wells.

Note that “passive” is a term of art in the Internal Revenue Code and does not cover portfolio investing (stocks and bonds). So if you collect $30,000 from stock dividends and have a $30,000 loss on Schedule E, you can’t net one against the other. But you can wise up, sell the stocks and use the proceeds to pay off the mortgage. At that point you’re probably out of the loss column on the rental and pulling real cash out of the property. A good part of the cash return will be sheltered from taxes by your depreciation deduction.

How are gains taxed when you sell a converted property? A lot depends on timing. If you lived in the property for at least two years and then rented it out for less than three, you may be able to use the provision that excludes $500,000 in gains from the sale of a principal residence, per couple, from tax. (You’ll still owe gains tax on the amount claimed as depreciation.) If you sell at a loss, the only deductible portion is the loss occurring after you converted the house from personal to income-producing use. The appraisal is crucial here.

Kerr hopes that sales prices will rebound in two years. Assume instead that they slide and she clears only $340,000, or $50,000 less than what her Realtors said her condo was worth when she converted it to a rental. Her tax basis in the property will be $364,500 (the $390,000 minus $25,500 for two years of depreciation). She’d be left with a $24,500 capital loss she can use to shelter taxable gains on other investments. Also, she could then claim any passive losses she couldn’t use before.

Renting does present problems. You must either maintain a property yourself or pay someone else to do it. Tax and real estate experts warn against hanging on to real estate if rent falls far short of your pretax, out-of-pocket costs. In other words, look to the tax benefits to sweeten the deal, not drive it, says tax accountant William Fleming of PricewaterhouseCoopers.

It’s a quote from a book I just finish reading : Cashflow Quadrant: Rich Dad Poor Dad.

It’s an interesting read – I know I’ve read it twice and the reason why I bring up this topic “Making Money” is because of the economy. Really – I look at my kids and I wonder … have I wasted my life. Have I been so busy in the pursuit of my own happiness that I can’t offer more for my children because I thought wanting to make more money was “evil”… or maybe because I was scared or too lazy to try?

This kind of book – how to make money or the mentality behind it really makes you think.

Yes I know – I’m not trying to make it rich or even become rich over night. But I do have that urge to do more, make a little extra so my kids can have it easy. If anything – learn a couple of money managing or wealth building skills I could teach my kids so they don’t end up like dear old dad – a slave to a job – always wondering if this recession or hard time will destroy all my dreams [ if I have any ].

What parent doesn’t want the best for their kids and who doesn’t dream of “making money effortlessly” … I mean seriously! It’s not like it can’t be done – People today are making money sitting at home. You have people who make six figure incomes because they came up with some lame application for the iphone that millions just had to buy.

The other reason I bring up the “money and how to make it” plus the mentality behind how you think and spend your money – is because of my loving wife. We are on opposite sides of the spectrum when it comes to money. I am more of a saver thinking of tomorrow and she is more of a “lets have fun today before we die tomorrow” kind of person. Which really makes it difficult when it comes to money and our finances.

I’m trying to get my daughter to read – Rich Dad Poor Dad
, by Robert T. Kiyosaki…
Not because I want her to be money hungry but rather I want her to think differently when it comes to money. In today’s economic crisis – millions of people are learning that having a job is not having security. We are all learning that depending on the government truly is more riskier than playing the stock market.

Wanting Better for your Kids Financially

Really is it bad to want better for your kids, financially speaking? Or maybe just the chance to change the way your kids look and think about money and how it works. I went to the book store yesterday and saw hundreds of posters and stickers about “buy 2 get one free” deals. Everyone is hurting in this economy – but the wealthy or smart people weather it better because they have options and a deferent mind set – as where regular people like me are stuck making money [income] at a dead end job. If you love your job, career hey that’s great. But when the kids ask for toys, milk or an unexpected expense comes along that breaks your bank – you only have X amount of dollars to work with because your boss is not going to give you a raise.

I watch the gas pump like a hawk [ not that it does me any good ] and at my job [ where I make most of my money after taxes ] I see people purchase with the gas pump in mind. I mean that people will say things like – “I have to watch my pennies, gas is too high”. Why, because even with a job – we live on a fixed income and every time gas goes up, food prices go up – our dollar [ spending power ] drops.

No I don’t want my kids to be greedy make money at all cost kind of people. But I do want them to think different, see the world different. Have the insight to take educated risk and plan wisely for the future. Rather than be like dad and save , save , save and be no farther ahead than I was 20 years ago. Or worse – be like Mom and millions of other Americans who live for today and now 20 years later still can’t see that their no better off than they were before.

Growing old and finding out that making money was important

I watch my father in-law who only has a year to go before he retires at age 50. It’s great that he has a job that gives him that ability – but he wonders if he could afford to retire. He is concerned with the fact that the money he makes, the money he saved, … will it be enough for him to live a comfortable life? I listen to him and wonder – what will I be thinking, doing when it’s time for me to retire – will I be able to retire?

Do I want my kids to do the same or can I teach them to do things, think in ways that will better them in the long run. That when they reach age 40, or 50 they could retire with little worries and if they work, it’s because they want to – not because they need to make money in order to survive.

I’m not talking making them into millionairs – just better off than me.