Chapter Nine
Chapter Nine - STILL WANT MORE? HERE ARE SOME TO DO’S
Many people may not be satisfied with my 10 steps. They see them more as philosophiesthan actions. I think understanding the philosophy is just as important as the action. There aremany people who want to do instead of think, and then there are people who think but do notdo. I would say that I am both. I love new ideas, and I love action.
So for those who want a to-do list on how to get started, I will share with you some of thethings I do, in abbreviated form.
• Stop doing what you’re doing. In other words, take a break and assess what is working and what is not working. The definition of insanity is doing the same thing over and over and expecting a different result. Stop doing what is not working, and look for something new.
• Look for new ideas. For new investing ideas, I go to bookstores and search for books on different and unique subjects. I call them formulas. I buy how-to books on formulas I know nothing about.
For example, in the bookstore I found the book The 16 Percent Solution by Joel Moskowitz. I bought the book and read it and the next Thursday, I did exactly as the book said. Mostpeople do not take action, or they let someone talk them out of whatever new formula theyare studying. My neighbor told me why 16 percent would not work. I did not listen to him because he’s never done it.
• Find someone who has done what you want to do. Take them to lunch and ask them for tips and tricks of the trade. As for 16 percent tax-lien certificates, I went to the county tax office and found the government employee who worked in that office. I found out that she, too, invested in the tax liens. Immediately, I invited her to lunch. She was thrilled to tell me everything she knew and how to do it. After lunch, she spent all afternoon showing me everything. By the next day, I found two great properties with her help that have been accruing interest at 16 percent ever since. It took a day to read the book, a day to take action, an hour for lunch, and a day to acquire two great deals.
• Take classes, read, and attend seminars. I search newspapers and the Internet for new and interesting classes, many of which are free or inexpensive. I also attend and pay for expensive seminars on what I want to learn. I am wealthy and free from needing a job simply because of the courses I took. I have friends who did not take those classes who told me I was wasting my money, and yet they’re still at the same job.
• Make lots of offers. When I want a piece of real estate, I look at many properties and generally write an offer. If you don’t know what the right offer is, neither do I. That is the job of the real estate agent. They make the offers. I do as little work as possible.
A friend wanted me to show her how to buy apartment houses. So one Saturday she, heragent, and I went and looked at six apartment houses. Four were dogs, but two were good. I said to write offers on all six, offering half of what the owners asked for. She and the agent nearly had heart attacks. They thought it was rude, and would offend the sellers, but I really don’t think the agent wanted to work that hard. So they did nothing and went on looking for a better deal.
No offers were ever made, and that person is still looking for the right deal at the right price. Well, you don’t know what the right price is until you have a second party who wants todeal. Most sellers ask too much. It is rare that a seller asks a price that is less than somethingis worth.
Moral of the story: Make offers. People who are not investors have no idea what it feels liketo try to sell something. I have had a piece of real estate that I wanted to sell for months. Iwould have welcomed any offer. They could have offered me 10 pigs, and I would havebeen happy—not at the offer, but just because someone was interested. I would havecountered, maybe for a pig farm in exchange. But that’s how the game works. The game ofbuying and selling is fun. Keep that in mind. It’s fun and only a game. Make offers. Someonemight say yes.
I always make offers with escape clauses. In real estate, I make an offer with language thatdetails “subject-to” contingencies, such as the approval of a business partner. Never specifywho the business partner is. Most people don’t know that my partner is my cat. If they acceptthe offer, and I don’t want the deal, I call home and speak to my cat. I make this ridiculousstatement to illustrate how absurdly easy and simple the game is. So many people make things too difficult and take it too seriously.
Finding a good deal, the right business, the right people, the right investors, or whatever isjust like dating. You must go to the market and talk to a lot of people, make a lot of offers,counteroffers, negotiate, reject, and accept. I know single people who sit at home and waitfor the phone to ring, but it’s better to go to the market, even if it’s only the supermarket. Search, offer, reject, negotiate, and accept are all parts of the process of almost everythingin life.
• Jog, walk, or drive a certain area once a month for 10 minutes. I have found some of my best real estate investments doing this. I will jog a certain neighborhood for a year and look for change. For there to be profit in a deal, there must be two elements: a bargain and
change. There are lots of bargains, but it’s change that turns a bargain into a profitable opportunity. So when I jog, I jog a neighborhood I might like to invest in. It is the repetition that causes me to notice slight differences. I notice real estate signs that are up for a long time. That means the seller might be more agreeable to deal. I watch for moving trucks going in or out. I stop and talk to the drivers. I talk to the postal carriers. It’s amazing how much information they acquire about an area. I find a bad area, especially an area that the news has scared everyone away from. I drive it for sometimes a year waiting for signs of some thing changing for the better. I talk to retailers, especially new ones, and find out why they’re moving in. It takes only a few minutes a month, and I do it while doing something else, like exercising, or going to and from the store.
• Shop for bargains in all markets. Consumers will always be poor. When the supermarket has a sale, say on toilet paper, the consumer runs in and stocks up. But when the housing or stock market has a sale, most often called a crash or correction, the same consumer often runs away from it. When the supermarket raises its prices, the consumer shops somewhere else. But when housing or the stock market raise their prices, the same consumer often rushes in and starts buying. Always remember: Profits are made in the buying, not in the selling.
• Look in the right places. A neighbor bought a condominium for $100,000. I bought the identical condo next door for $50,000. He told me he’s waiting for the price to go up. I told him that profit is made when you buy, not when you sell. He shopped with a real estate broker who owns no property of her own. I shopped at the foreclosure auction. I paid $500 for a class on how to do this.
My neighbor thought that the $500 for a real estate investment class was too expensive. Hesaid he could not afford the money, or the time. So he waits for the price to go up.
• Look for people who want to buy first. Then look for someone who wants to sell. A friend was looking for a certain piece of land. He had the money but did not have the time. I found a large piece of land, larger than what my friend wanted to buy, tied it up with an option, called my friend, and he said he wanted a piece of it. So I sold the piece to him and then bought the land. I kept the remaining land as mine for free. Moral of the story: Buy the pie, and cut it in pieces. Most people look for what they can afford, so they look too small. They buy only a piece of the pie, so they end up paying more for less. Small thinkers don’t get the big breaks. If you want to get richer, think big.
• Think big. Retailers love giving volume discounts, simply because most business people love big spenders. So even if you’re small, you can always think big. When my company was in the market for computers, I called several friends and asked them if they were ready to buy also. We then went to different dealers and negotiated a great deal because we wanted to buy so many. I have done the same with stocks. Small people remain small because they think small, act alone, or don’t act all.
• Learn from history. All the big companies on the stock exchange started out as small companies. Colonel Sanders did not get rich until after he lost everything in his 60s. Bill Gates was one of the richest men in the world before he was 30.
• Action always beats inaction.
These are just a few of the things I have done and continue to do to recognize opportunities. The important words are “have done” and “do.” As repeated many times throughout thebook, you must take action before you can receive the financial rewards. Act now!
FINAL THOUGHTS
I would like to share some final thoughts with you.
The main reason I wrote this book, and the reason it has remained a bestseller since 2000,was to share insights into how increased financial intelligence can be used to solve many oflife’s common problems. Without financial training, we all too often use the standardformulas to get through life: Work hard, save, borrow, and pay excessive taxes. Today, morethan ever, we need better information.
I use the following story as an example of a financial problem that confronts many youngfamilies today. How do you afford a good education for your children and provide for yourown retirement? It requires using financial intelligence instead of hard work.
A friend of mine was griping one day about how hard it was to save money for his fourchildren’s college educations. He was putting $300 away in a college fund each month andhad so far accumulated only about $12,000. He had about 12 more years to save for collegesince his oldest child was then six years old.
At the time, the real estate market in Phoenix was terrible. People were giving houses away. I suggested to my friend that he buy a house with some of the money in his college fund. Theidea intrigued him, and we began to discuss the possibility. His primary concern was that hedid not have credit with the bank to buy another house since he was so over-extended. Iassured him that there were other ways to finance a property rather than through the bank.
We looked for a house for two weeks, a house that would fit all our criteria. There wereplenty to choose from so shopping was fun. Finally, we found a three-bedroom, two-bathhome in a prime neighborhood. The owner had been downsized and needed to sell that daybecause he and his family were moving to California where another job waited. The ownerwanted $102,000, but we offered only $79,000. He took it immediately and agreed to carryback the loan with a 10 percent down payment. All my friend had to come up with was $7,900. As soon as the owner moved, my friend put the house up for rent. After all expenseswere paid, including the mortgage, he put about $125 in his pocket each month.
His plan was to keep the house for 12 years and let the mortgage get paid down faster byapplying the extra $125 to the principal each month. We figured that in 12 years, a largeportion of the mortgage would be paid off and he could possibly be clearing $800 a monthby the time his first child went to college. He could also sell the house if it had appreciatedin value.
Three years later, the real estate market greatly improved in Phoenix and he was offered $156,000 for the same house by the tenant who lived in it. Again, he asked me what Ithought. I advised that he sell it, using a 1031 tax-deferred exchange.
Suddenly, he had nearly $80,000 to operate with. I called another friend in Austin, Texas,who then moved this tax-deferred capital gain into a mini-storage facility. Within threemonths, he began receiving checks for a little less than a $1,000 a month which he thenpoured back into the college fund.
A couple of years later, the mini-warehouse sold, and he received a check for nearly $330,000 as proceeds from the sale. He rolled those funds into a new project that wouldnow generate over $3,000 a month in income, again, going into the college fund. He is nowvery confident that his goal will be met easily.
It only took $7,900 to start and a little financial intelligence. His children will be able toafford the education they want, and he will then use the underlying asset, wrapped in hislegal entity, to pay for his retirement. As a result of this successful investment strategy, hewill be able to retire early.
Thank you for reading this book. I hope it has provided some insights into utilizing thepower of money to work for you. Today, we need greater financial intelligence to simplysurvive. The idea that “it takes money to make money” is the thinking of financiallyunsophisticated people. It does not mean that they’re not intelligent. They have simply notlearned the science of money making money.
Money is only an idea. If you want more money, simply change your thinking. Every self-made person started small with an idea, and then turned it into something big. The sameapplies to investing. It takes only a few dollars to start and grow it into something big. I meetso many people who spend their lives chasing the big deal, or trying to amass a lot of moneyto get into a big deal, but to me that is foolish. Too often I have seen unsophisticatedinvestors put their large nest egg into one deal and lose most of it rapidly. They may havebeen good workers, but they were not good investors.
Education and wisdom about money are important. Start early. Buy a book. Go to a seminar. Practice. Start small. I turned $5,000 cash into a one-million-dollar asset producing $5,000a month cash flow in less than six years. But I started learning as a kid. I encourage you tolearn, because it’s not that hard. In fact, it’s pretty easy once you get the hang of it.
I think I have made my message clear. It’s what is in your head that determines what is inyour hands. Money is only an idea. There is a great book called Think and Grow Rich. Thetitle is not Work Hard and Grow Rich. Learn to have money work hard for you, and your lifewill be easier and happier. Today, don’t play it safe. Play it smart.
The Three Incomes
In the world of accounting, there are three different types of income:
1. Ordinary earned
2. Portfolio
3. Passive
When my poor dad said to me, “Go to school, get good grades, and find a safe secure job,”he was recommending I work for earned income. When my rich dad said, “The rich don’twork for money. They have their money work for them,” he was talking about passiveincome and portfolio income. Passive income, in most cases, is income derived from real estate investments. Portfolio income is income derived from paper assets such as stocks and bonds. Portfolio income is the income that makes Bill Gates the richest man in the world, not earned income.
Rich dad used to say, “The key to becoming wealthy is the ability to convert earned incomeinto passive income or portfolio income as quickly as possible.” He would say, “Taxes arehighest on earned income. The least-taxed income is passive income. That is another reasonwhy you want your money working hard for you. The government taxes the income you workhard for more than the income your money works hard for.”
In my second book, Rich Dad’s CASHFLOW Quadrant®, I explain the four different typesof people who make up the world of business. They are E (Employee), S (Self-employed), B (Business Owner), and I (Investor). Most people go to school to learn to be an E or an S.
The CASHFLOW Quadrant is written about the core differences of these four types and howpeople can change their quadrant. In fact, most of our products are created for people in the B and I quadrants.
In Rich Dad’s Guide to Investing, book number three in the Rich Dad series, I go into moredetail on the importance of converting earned income into passive and portfolio income. Rich dad used to say, “All a real investor does is convert earned income into passive andportfolio income. If you know what you’re doing, investing is not risky. It’s just commonsense.”
The Key to Financial Freedom
The key to financial freedom and great wealth is a person’s ability to convert earned incomeinto passive and/or portfolio income. My rich dad spent a lot of time teaching Mike and methis skill. Having this ability is the reason my wife Kim and I are financially free, neverneeding to work again. We continue to work because we choose to. Today we own a realestate investment company for passive income and participate in private placements andinitial public offerings of stock for portfolio income.
We also went back to work to build a financial-education company so that we can continueto create and publish books and games. All of our educational products are created to teachthe same skills my rich dad taught me, the skills of converting earned income into passiveand portfolio income.
The games we create are important because they teach what books cannot teach. Forexample, you could never learn to ride a bicycle by only reading a book. Our CASHFLOW®games for adults and CASHFLOW for Kids game are designed to teach players the basicinvestment skills of converting earned income into passive and portfolio income. They alsoteach the principles of accounting and financial literacy. These games are the onlyeducational products in the world that teach people all of these skills simultaneously.
CASHFLOW 202 is the advanced version of CASHFLOW 101 and requires the game boardfrom 101, as well as a full understanding of 101, before it can be played. CASHFLOW 101and CASHFLOW for Kids teach the principles of fundamental investing. CASHFLOW 202
teaches the principles of technical investing. Technical investing involves advanced trading techniques such as short selling, call options, put options, and straddles. A person who understands these advanced techniques is able to make money when the market goes up, as well as when the market comes down. As my rich dad would say, “A real investor makes money in an up market and a down market. That is why they make so much money.” One of the reasons they make more money is simply because they have more self-confidence. Rich dad would say, “They have more self-confidence because they are less afraid of losing.” In other words, the average investor does not make as much money because they are so afraid of losing money. The average investor does not know how to protect themselves from losses, and that is what CASHFLOW 202 teaches.
Average investors think investing is risky because they have not been formally trained to beprofessional investors. As Warren Buffett, America’s richest investor says, “Risk comesfrom not knowing what you’re doing.” My board games teach the simple basics offundamental investing and technical investing while people are having fun.
I occasionally hear someone say, “Your educational games are expensive,” which poses thequestion of ROI, the return on investment, or the value returned for the price paid. I nod myhead and reply, “Yes, they may be expensive, especially when compared to entertainmentboard games. But my games are not as expensive as a college education, working hard allyour life for earned income, paying excessive taxes, and then living in terror of losing all ofyour money in the investment markets.”
When someone walks away mumbling about the price, I can hear my rich dad saying, “If youwant to be rich, you must know what kind of income to work hard for, how to keep it, andhow to protect it from loss. That is the key to great wealth.” Rich dad would also say, “Ifyou do not understand the differences in those three incomes and do not learn the skills onhow to acquire and protect those incomes, you will probably spend your life earning lessthan you could and working harder than you should.”
My poor dad thought a good education, a good job, and years of hard work were all youneeded to be successful. My rich dad also thought a good education was important. But tohim it was also important that Mike and I know the differences in the three incomes and whatkind of income to work hard for. To him, that was basic financial education. Knowing thedifferences in the three incomes and learning the investment skills of how to acquire thedifferent incomes is basic education for anyone who strives to acquire great wealth andachieve financial freedom—a special kind of freedom that only a few will ever know. Asrich dad states in lesson number one, “The rich do not work for money. They know how tohave money work hard for them.” Rich dad said, “Earned income is money you work for,and passive and portfolio income is money working for you.” Knowing that little differencehas been significant in my life. Or, as Robert Frost ends his poem, “And that has made allthe difference.”
Take Action!
All of you were given two great gifts: your mind and your time. It is up to you to do what youplease with both. With each dollar bill that enters your hand, you, and only you, have the power to determine your destiny. Spend it foolishly, and you choose to be poor. Spend it on liabilities, and you join the middle class. Invest it in your mind and learn how to acquire assets, and you will be choosing wealth as your goal and your future. The choice is yours, and only yours. Every day with every dollar, you decide to be rich, poor, or middle class.
Choose to share this knowledge with your children, and you choose to prepare them for theworld that awaits. No one else will.
You and your children’s future will be determined by choices you make today, not tomorrow.
I wish you great wealth and much happiness with this fabulous gift called life.
– Robert Kiyosaki