A short intro about the "Rich Dad" series

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Mr. Kiyosaki has had an interesting life where he received a lot of lessons that took many much longer to accumulate, and now he had decided to share the lessons with us. There are a whole series of books:

  • Rich Dad Poor Dad -- the book that started it all
  • Rich Dad's Guide to Investing -- investor controls to minimize risk, different levels of investors
  • Rich Dad's Cashflow Quadrant -- the four types of earners: employee, self-employed, business owner, investor, and how/why one side gets rich
  • Retire Young, Retire Rich -- power of leverage, in various areas
  • Rich Dad's Prophecies -- why the stock market will crash (and it did) and what you can do about it
  • Rich Dad's Success Stories -- how dozens and dozens of people turned their financial life around thanks to Rich Dad
  • and the boardgames, Cashflow 101 and 202 -- teaches you how to get out of the rat race and get onto the fast track by investing in real-estate
        and many many more

What does it all really teach? Here are the main points, and it's really not a secret:

* You must really really WANT to be rich. Most people say they want to be rich, but they are not willing to pay the price, as often that price involves reexamining one's core values, and updating them. Most want to be rich, but are not willing to pay the price. They want to know if there's a "shortcut", like a magic pill to weight loss, that would let them be rich without making any changes, and of course, there is no such a thing.
* You must learn financial literatecy. If you know what is an asset and what is a liability, then the rest should be easy, such as profit/loss, financial statement, loan APR, annual ROI (return on investment), and so on.
If you know all this, then the basic idea is actually breathtakingly simple: to obtain financial freedom, you need to obtain enough "passive income" (i.e. the money you do NOT have to work for) so that you no longer have to work for a living (in other words, your passive income exceeds your expenses). How you get that much passive income is up to you, but it can be obtained multiple ways:
  • == real estate investments, especially rental properties, where rent > (mortgage + tax + management + other fees/expenses), i.e. "positive cashflow"
  • == stocks paying good dividends
  • == business investments, where you invest in a business and the business pays you back, could be as simple as vending machines to as exotic as IPOs
  • == any other type of investment where you get paid without having to work for it
Keep in mind that such investment into passive income must exceed rate of inflation, else you really haven't earned a thing.
In a typical scenario, one would start investing in a "starter home", 2BR/1BA, and rent it out. Study the market so that the rent income exceeds the mortage, plus property tax and other fees such as closing escrow and such (do research first!), and perhaps, if you don't want the headache, pay someone else to manage the property and to locate tenant (under 10% of rental price). Then you get the passive income everybody month, without doing anything. When the time is right, when you've accumulated enough asset, put the money down on another, then another... The more you hold, the more monthly income you got, and the faster you can invest on another property. They don't even have to be in the same state!  When you see a bigger opportunity come along, sell some of the smaller houses and trade upto a bigger house. In the USA, this "trade-up" means you don't have to pay for capital gains tax until the big house is sold (unless of course, you trade up to something even bigger). Use the chance to trade upto larger houses, duplexes, multiplexes, apartments... You get the idea. Bigger the building the more cashflow (and potentially the better ROI).
I can hear you all complaining already... What about down payment? What about credit score? What about tenants? What about accidents and so on? And so on and so forth.
Downpayment is usually NOT a problem. You can borrow from relatives, you can borrow from your 401K or IRA... you can negotiate with the current owner to finance the down payment over 12-24 months, or you can go for a zero-down loan... There are plenty of ways around it. Or you can live frugally for a year or two (not upgrade the car, no Starbucks Frappuccino (tm) everyday, pack your own lunch instead of eating out...) and save a few thousand dollars... or combine all of the above... The point is... it can be done, you just need to find a way (or ways).
(Which brings up one of Rich Dad's lessons: never say "I/we can't afford it." Instead, ask "How can I/we afford it without illegal/amoral means?" The former answer basically says "I give up." The latter answer actually makes you THINK about the problem, and may come up with creative answers. This requires some deep core-value reprogramming, so consider this a pre-requisite)
As for your credit score, as long as you have DECENT credit score, it should not be a problem, because a mortgage is a SECURED LOAN. If you don't pay up, the bank takes the house (actually it's called foreclosure, but you get the idea). So the risk for the bank is rather minimal, and bank loves a secure investment. Talk to several banks and see what kind of a deal you get. Use the Internet to help you. While the credit market has tightened, bank *should* lend money to buy rental propety if you can prove that the property is expected to generate POSITIVE cashflow by demonstrating what the the neighbors are paying for for rent and what a new tenant can be expected to pay. This may require you to retain the services of a management company early on.
[And if a bank turn you down, ask nicely the loan officer on WHY he turned you down. You will learn a lot about how bankers think, and often, it's because your books are muddy and unclear.]
What about tenants and complaints on such? Hire a property management firm or if the place is big enough, hire an on-site property manager. Property management firm typically charge about 8% of rent, but does ALL the work for you... Maintained, tenant finding and advertising, tenant screening, rent collecting... So you never have to worry about the lousy details. Heck, if you are rich enough, they'll even FIND the property for you AND manage it for you!
Accidents? Get some general liability insurance. Just make sure they cover tenant-caused damage as well as accidents. Heck, the loan probably included all that. After all, the bank wants to know their property is protected, right? If not, get some quotes, and add that to your bottom line.
HINT: One of the best ways is to construct your own cashflow estimator using a spreadsheet. The variables are mortgage, rate, down payment, 2nd note, note rate, expected rent, management fee, insurance, tax, other costs, and so on. You can make it as complicated as you wish. Using the Internet, you can easily find the average rent in the neighborhood, and confirm that with a call to some real estate management company in the area. So as soon as you see an ad, you can plug in some numbers and see if this house will likely generate positive cashflow, and how much. There is also a real-estate evaluator on the RichDad.com website
You see, all problems are solvable. If you think this is risky, then you can't afford to lose, which would make you a financial loser in Rich Dad's book. Yes, a "financial loser" is defined as someone who can't afford to lose. When you invest, you must accept that you cannot always win (unless you cheat, but we won't go there). You can manage the risk so you win more than you lose, but you WILL lose sometimes. If you can't afford to lose, then you already lost.
Example: most people buy lottery. They know their chances are slim to none, but they can afford to lose a few dollars. However, if you ask them to invest $1000, even though the chances are in their favor (say, 60% chance of win), most people will hesitate, because most simply don't have $1000 to lose. But if you can't even invest $1000, how can you even THINK about investing for financial freedom?
I was analyzing a property the other day. In San Francisco, this condo unit in a 20-unit apartment may be for sale at $300K. Down payment at 5% is 15K. Assuming rate of 5.25%, monthly payment is about $1600. The unit should rent out for $2000 a month, so passive income is $400. Even if you take out taxes, management, and stuff, the passive income should still be $250 or $300 per month. Assume low-end, $250 per month is $2500+$500, or $3000 passive income per year, which makes annual ROI on investment of $15K an impressive 20%!  (3K a year on 15K investment). Even if you only make $150 a month (maybe interest rate is high, or management fee, or whatever) that's still $1500+300 = $1800 a year, or ROI of 12%!  You certainly won't get that sort of ROI from a bank now, when CDs are paying what? 3-4% APR at best? (And these are 5K min CDs, not money market)
(Sidenote: I checked on the cost of management company. Average seems to be about 8% of rental price. If rent is $2000, then cost is $160)
And if the real estate market goes back up, say, 10% in 12 months. So the 300K house is now worth 330K. My investment has DOUBLED (as I put down 15K or 5%), PLUS all that cashflow I've received monthly! (let's see, even at the lowest estimate, $150 monthly cashflow, I've pocketed 1800! Net is $31800, over 218% return!
How much can you get if during the same time, stock market goes up 10%? You get 1500 from your investment of 15K. That's it. Net, 15K, 10%.
In other words, by using OPM / leverage, you have multiplied your earning potential by over tenfold. That is the power of getting rich using leverage, or OPM (other people's money).
However, one word of caution. If you use OPM, when you lose, you lose big as well. And there are severe consequences of losing other people's money.
And the fun part about this is, the MORE you invest, the faster your investment can grow. The increase in cashflow means you can accumulate excess cash faster, which means you can afford another down payment faster, or afford a larger property with even MORE cashflow. (assuming you didn't let the success go to your head and you start accumulating bad debt liabilities and doodads)
In a city of San Francisco, housing is ALWAYS in demand, and only the recent downturn in economy have pushed down prices. So as the prices bottom out, the rebound will see your home appreciate. However, here's another Rich Dad (tm) advice: treat appreciation of your asset as a bonus, not as a reason to invest. Cashflow is more important.
Please keep in mind though that local laws such as rent control, rental tax, etc. may impact your calculations. However, as a real-estate owner, you can deduct a lot of expenses, such as management fee, depreciation of property, and so on when the time comes to pay the income tax.
Once you have accumulated enough properties to provide you with enough passive income to meet ALL of your expenses, and even have some left over, you are out of the rat race and onto the fast track. Because you no longer have to work for a living, but can live off your passive income indefinitely. And really, that's it. Repeat the advice above and that's pretty much it. It'll take several years, but it beats wishful thinking that your IRA / 401K / Social Security will be enough to let you retire in comfort when you turn 65.
If it's this simple, why haven't more people done it? According to Rich Dad (tm), it's because not all people can learn financial competence, or are willing to learn. Most simply do as their parents have done, without examining what they were taught. According to Rich Dad (tm), one must constantly learn new ways of doing things. If that new way is better than what you have now, consider adopting that new way. Most people do not want to change, and thus, they will never change. This goes back to the first requirement: not all people are willing to pay the price to be rich.
The old saying that you can't teach an old dog new tricks does apply here. Or as Mr. Kiyosaki puts it... "Never teach a pig to sing. You will waste your time, and it annoys the pig." Some people become automatically combative when you challenge their core values. They cannot detach themselves and see the problem objectively. To them, core value is associated with emotion, and when you invest with emotion, you will lose.
What does that really mean? it involves some core values that you may need to reexamine. For example... You are always taught that you need to do well in school, go to college, then get a good job, and hopefully stay there, put a lot of money into 401K or IRA, and retire happily at age 65. Right? Do you really BELIEVE that will happen, with the way Social Security and Medicare and stuff is going down the tubes? Why do you think Obama and Congress is fighting so hard over universal health care? Even if that's true, there's always the danger of downsizing / rightsizing / whatever they call that nowadays.
Yet, as we have discussed, the Rich Dad (tm) system involves making investments so you no longer have to work for your living. So one of the prices to being financially free via the Rich Dad (tm) system is this: you must RE-EXAMINE your core training, something drilled into you since birth, that work for a living will eventually allow you to retire happily, NO LONGER HOLDS TRUE. Clearly, times have changed. The idea of living wage, pension for life, and such are from the INDUSTRIAL AGE, which started OVER 100 YEARS AGO. We are NO LONGER in the industrial age. We are now in the INFORMATION age. So why are we still holding on to the same values when they no longer apply?
(For those of you who are interested in what the Rich teaches their kids, check out Rich Dad, Rich Kids, another book by Mr. Kiyosaki).
So hopefully I have shaken you out of your stupor. The fact that you are reading this shows you are willing to take the first step. however, that doesn't mean you really ARE trying. You need to fully realize what price you must pay in order to become rich, and pay that price, in order to gain financial freedom.
In the future, we will discuss the price of everything (not in terms of money, but other things), losing vs. winning, stocks and options, and more.

Books mentioned:

Cashflow Quadrant: Rich Dad's Guide to Financial Freedom

Rich Dad's Guide to Investing: What the Rich Invest in, That the Poor and the Middle Class Do Not!
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