Wisdom of Rich Dad

I remember a lot of comments from readers and also from people I meet in person who tell me that they are just looking for a place to live and are not really looking for a real estate investment.

My default answer is “Why not treat your first home as an investment?”

In reality, once you buy a property, you become a real estate investor. Buying a home is often considered to be the biggest investment one can make so it’s best to treat it as a real investment — one which will give you reasonable returns if you do decide to turn it into a rental property or if you sell it further down the road.

What are reasonable returns?

Normally, when a person buys a house which he intends to live in, he does not consider how much rent he would earn if he decides to rent the property out, and whether the possible rental income would be more than his monthly amortization. It is not uncommon for a homeowner who moves up the corporate ladder or improves his situation to move to a better home but keep his first home for sentimental reasons.

Thus, if in the future, the homeowner decides to move to another house and converts his first house into a rental property, the rentals are often not enough to cover the monthly amortizations, thereby producing a negative cashflow situation.

Had the homeowner considered his first house as a real investment, he could have dedicated more time to finding a property that would fetch better rental rates which could cover the monthly amortizations, thus giving the owner a nice positive cashflow.

More often than not, factors that may affect market values and appreciation are not given too much attention by a home buyer as the primary goal is just to have a place to live in. When the time comes to sell the property, it is very likely that there is little or no room for significant profits.

At times, the homeowner may even have to sell at a loss. This situation could have been avoided had the home owner considered buying a property that was way below market value*.

*-”Market Value” is the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently, and without compulsion.

Buying a property below market value would be in alignment with what Robert Kiyosaki often says, which is “You should make money when you buy, not when you sell”.

 Money is made in the form of equity* at the time the property is bought and the profit is realized when the property is sold. Robert Kiyosaki is the bestselling author of Rich Dad Poor Dad.

*- Equity is the difference between a property’s current appraised value or market value and the loan principal balance

The opportunity is there so don’t waste it

Everyone at one point or another will really have to buy his or her own home so why not make the most out of the opportunity? If done well, one could gain passive income in the form of positive cashflow, or a significant profit, or both. At the very least, the education one can gain from treating his first home as a real estate investment is priceless.

It is virtually risk-free

Since initially the goal of the home buyer is to have a place to live in, he would not really be concerned with holding costs associated with properties that take time to lease or sell. He/she lives in the place anyway so this makes it virtually risk-free in my opinion.

In fact, I apply the same strategy to all of the deals that I have done this year as my last fallback would be to live in the property just in case I am unable to sell or rent it quickly.

The challenge in deciding to live in one’s investment property

If one decides to live in his/her own investment property, chances are one will have the tendency to  fall in love with the property and over-improve it. I guess that’s the only risk that one should manage. Falling in love with a property can cloud one’s judgment and introduce costly improvements that one might no longer be able to recover.

If your first home is good investment, it can lead to more investment properties

If one buys his first home as an investment and not just as a place of residence, it can help ensure that more real estate investments would follow or at least it won’t prevent the homebuyer from buying more investment properties. Believe me when I say that buying a home that costs too much and is considered to be a liability can really hinder one’s ability to build enough capital to buy the next investment property. This is based on first-hand experience.

Ready to buy your first home? I wish you successful investing!

Have you realized that NOW is a GREAT time to invest in real estate, but you just don’t have the money to do it? Here are several ways you can generate cash for your next investment to make sure you can cash on the great opportunity that this market is providing.

One big Detroit Area investor, Darrick Scruggs, the owner of My First Michigan Homeand many other companies, said, “Most of your problems will disappear if you become world-class at raising money.”

Most people will read this and think that I am stating the obvious. Many of these same people will say that they don’t have any money. If they had money, they say, THEY would be raking in millions, too.

I’m here to tell you that you NEED money, but nobody said it had to be your own. I know! Many of us have heard that, too. So how do you use “other people’s” money?

Besides using your own cash, have you considered….

1. Make Money as a Middleman: You can wholesale properties until you get enough cash to do bigger, more profitable deals.

2. Borrow from a Lending Institution: Today this is not always so easy, but can be done, still. Use the money for your investments. Don’t get distracted using that borrowed money for other things.

3. Refinance Your Home: You can (a) get more money to invest, or (b) use the reduced monthly payment to make it easier to create a positive monthly cash flow from the property or other investment that you will buy.

4. Use Credit Cards: Obviously, you have to be careful with this since most credit cards charge a high interest rate. However, if you can make a quick $20,000 profit within six (6) months, would you be willing to pay around $4,000 in interest payments? (This figure comes form borrowing $30,000 @ 30% for 6 months. Most people can get better terms on their credit cards than this.)

5. Obtain a Second Mortgage: Tap into your home equity, and use that money for a killer investment.

6. Borrow from Your Retirement (401K, 403b, Roth, SEP, etc.) Account: You can use this as collateral for a loan and use this money for investments.

7. Solicit Other Active Investors: These people are always looking for ways either to have their money work for them harder or make good money without them having to do any work.

8. Use Money from Passive Investors: How many people do you know complain about their 401K shrinking? They have less control over the bigwigs at the companies overseeing mutual funds than they do you. If you know how to make them money and can show them how you are going to make them money, many of these people will feel safer investing with you. Many of these people would be delighted if you could promise them a return of 8% – 10%.

9. Team with Other Investors: Sometimes, there will be a project where you have some expertise but missing another piece of it. Other times, you might have the idea but not the money or vice versa. Find a another person who has your “missing piece.”

10. Friends and Family: This is a possible source, but be careful with this one! Really!!!

11. Borrow from a Hard Money Lender: This is similar to a credit card, but while they are expensive, they often are cheaper than a credit card; however, the repayment terms are usually shorter. This is suggested more for quick turning than it is for rentals. You can use their money to gain quick chunks of money for only a small price compared to your quick profit.

12. Buy on Land Contract: Usually the price will be higher, but you do not have to use as much of your own money. Run the numbers to make sure it works for you, but several investors got started this way.

Use these techniques responsibly. These are great ideas, but if they are used improperly, you can create some tough situations for yourself. Do your due diligence on the investment opportunity. Make sure that you have a backup plan in case your main plan backfires. These are the two (2) most common investing mistakes.

Make sure that you have a plan and that you thoroughly thought out that plan. You do not want to make a habit of using borrowed money just to lose it. We all make mistakes, but make sure you do your due diligence to reduce your chance of making them. Calculate your risk.

No matter your investment, remember this! NEVER “invest” more than you can afford to lose. That’s called GAMBLING on the Hope-n-Pray method. Save this for your fun money. Feel free to ask me more questions about that.

In my pursuit for further educating myself when it comes to achieving financial freedom, I enrolled myself in a free online coaching in the Rich Dad Poor Dad lessons of Robert Kiyosaki.

In one of the chapters of the e-learning that I’ve been reading, Robert Kiyosaki suggested the Rich Dads Get Rich Strategies in which he used to get out of the rat race and become a business owner and investor.

I would like to share it all to you my readers so we can also use it to achieve financial freedom just like what Robert Kiyosaki did:

STRATEGY 1: Become financially literate.

The number 1 strategy to get rich is to become financially literate. Financial literacy is not always taught in schools. It requires proficiency in several areas: economic history, accounting, taxes, investing and building businesses. These are difficult subjects but don’t let the difficulty scare you.

Becoming financially literate has nothing to do with how far you got in school. It doesn’t matter whether you’re a failure in school, a jeepney driver, a janitor, or an executive of the company. What matters most is that you’re willing to educate yourself.

One of the things that I learned about financial literacy is on cash flow patterns. Based on these cashflow patterns, you would be able to determine if you belong to poor, middle class or rich persons.

Kiyosaki compared people with average financial intelligence vs. people with advanced financial intelligence:

People with average financial intelligence know only:

• Bad debt, which is they try to pay it off.
• Bad losses, which is why they think losing money is bad.
• Bad expenses, which is why they hate paying bills.
• Taxes they pay, which is why they say that taxes are unfair.
• Climbing the corporate ladder instead of owning the ladder.
• Buying shares of a company rather than selling shares of a company they own
• Investing only in mutual funds or picking only blue-chip stocks

People with advanced financial intelligence know the difference between:

• Good debt and bad debt
• Good losses and bad losses
• Good expenses and bad expenses
• Tax payments and tax incentives
• Corporations you work for and corporations you own
• How to build a business, how to fix a business, and how to take a business public
• The advantages and disadvantages of various investment vehicles: paper securities, real estate properties, and businesses

STRATEGY 2: Work to Learn

Most people focus on working for pay that rewards them in the short term; over the long term, this strategy can be disastrous because it doesn’t build up enough assets for a stress-free retirement. You’re not sure if your employer will be there for the next 10 years. What if you were laid off? Or what if the company closed?

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Robert Kiyosaki is an investor, author, and motivational speaker.  You probably have heard of his Rich Dad Poor Dad books.

Here are some of my favorite Robert Kiyosaki quotes:

• Your business revolves around your asset column, as opposed to your income column. The rich focus on their asset columns while the poor and middle class focus on their income columns
• Remember to dream big, think long-term, underachieve on a daily basis, and take baby steps.  That is the key to long-term success
• You need to understand the difference between an asset and a liability. An asset puts money in your pocket and a liability takes money from your pocket. The rich understand the difference and buy assets, not liabilities
• Your future is created by what you do today, not tomorrow
  The size of your success is measured by the strength of your desire; the size of your dream; and how you handle disappointment along the way
• Your mentors in life are important, so choose them wisely
  The only difference between a rich person and poor person is how they use their time
• Academic qualifications are important and so is financial education. They’re both important and schools are forgetting one of them
• The poor, the unsuccessful, the unhappy, the unhealthy are the ones who use the word tomorrow the most

• Most people never get wealthy simply because they are not trained financially to recognize opportunities right in front of them. The rich have learned to recognize opportunities as well as how to create them
• The rich invent money
• Tomorrows only exist in the minds of dreamers and losers
• Inside of every problem lies an opportunity
• Remember, your mind is your greatest asset, so be careful what you put into it
• Face your fears and doubts, and new worlds will open to you
• If you want to go somewhere, it is best to find someone who has already been there
• Today is the word for winners and tomorrow is the word for losers
• When people are lame, they love to blame
• He said, ‘Raise your price. Make it ridiculous. ‘That would make people perceive it as a value
• Great opportunities are not seen with your eyes. They are seen with your mind
• The poor and middle class work for money. The rich have money work for them
• You have to be smart. The easy days are over

 The last one is my favorite of this batch of quotes.