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Robert Kiyosaki Why the Rich Get Richer

Think Rich to Lower Your Taxes

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Good (1710 Ratings): 2.472516/5

Posted on Monday, April 2, 2007, 12:00AM

Tax season always means a deluge of tax advice. Unfortunately, most of it is futile and lightweight.

I say that because most people work for their money rather than have their money work for them. The problem with working for your money is that you pay more in taxes as your income goes up. In fact, if your income passes $65,000 as a W-2 employee, you may find yourself being double-taxed with the Alternative Minimum Tax, or AMT.

Working hard to earn more money and then giving it away in higher taxes isn't financially intelligent, even if you do put some of it into a retirement account. On the other hand, making your money work hard for you means your earnings are taxed less, if at all.

Better Financial Advice

Recently, on a popular morning TV show, a personal finance expert recommended putting half of your tax return into your IRA, which she claimed may yield (for the average person) a whopping $25,000 gain over 40 years.

The problem with this advice is the likely decline in the purchasing power of the dollar -- inflation -- over that 40 years. I estimate that in 40 years, $25,000 will probably have the equivalent purchasing power of $250 today. Try getting excited about living on $250 when you're old.

To me, it's better to inform people about who pays taxes and who (legally) doesn't pay taxes. If you can minimize taxes or avoid paying them altogether (again, legally), you can make a lot more money today instead of having to wait, with your fingers crossed, for 40 years.

Playing by the Rules of the Rich

Years ago, my rich dad told me, "When it comes to taxes, the rich make the rules." He also said, "If you want to be rich, you need to play by the rules of the rich." The rules of money are skewed in favor of the rich, and against the working and middle classes. After all, someone has to pay taxes.

There are many ways that the rich make a lot of money and pay little to no money in taxes, and anyone can use them. As an illustration, here's a real-life situation in which I played by the rules of the rich and minimized my taxes:

• 2004: My wife, Kim, and I put $100,000 down to purchase 10 condominiums in Scottsdale, Ariz. The developer paid us $20,000 a year to use these 10 units as sales models. So we received a 20 percent cash-on-cash return, on which we paid very little in taxes because the income was offset by the depreciation of the building and the furniture used in the models. It looked like we were losing money when we were in fact making money.

• 2005: Since the real estate market was so hot, the 380-unit condo project sold out early. Our 10 models were the last to go. We made approximately $100,000 in capital gains per unit. We put the $1 million into a 1031 tax-deferred exchange. We legally paid no taxes on our million dollars of capital gains.

• 2005: With that money, we purchased a 350-unit apartment house in Tucson, Ariz. The building was poorly managed and filled with bad tenants who had driven out the good tenants. It also needed repairs. We took out a construction loan and shut the building down, which moved the bad tenants out. Once the rehab was complete, we moved good tenants in and raised the rents.

• 2007: With the increased rents, the property was reappraised and we borrowed against our equity, which was about $1.2 million tax-free, because it was a loan -- a loan which our new tenants pay for. Even with the loan, the property still pays us approximately $100,000 a year in positive cash flow.

Kim and I are currently investing the $1.2 million in another 350-unit apartment house in Flagstaff, Ariz., a hot property market.

Move Money, Don't Park It

This is an example of an investment strategy known as the velocity of money. As I've written before, moving your money makes more sense than parking it in cash, bonds, equities, or mutual funds -- the strategy most financial advisors recommend.

Kim and I have several such scenarios active at any one time. We have lots of monthly cash flow, which we reinvest, but we rarely have any liquid cash sitting around to be taxed.

In the above example, we started with $100,000 we earned tax-deferred from another investment. The $100,000 eventually allowed us to borrow over $20 million from banks, tax-free. How long would it take you to save $20 million by parking your money somewhere, as most financial advisors recommend?

Chipping Away at Taxes

Clearly, one of the reasons the rich get richer is because they earn a lot of money without paying much, if anything, in taxes. They know how to use banks' tax-free money to become richer.

Anyone can do the same. For instance, instead of paying capital gains tax on the sale of our condo units, real estate laws allowed us to defer paying these taxes and invest them into another property instead. The cash that does come from this property goes into our pockets at a lower tax rate because there's no Social Security or self-employment tax to pay, and the tax rate is further reduced by the depreciation of the property.

On the flip side, the poor and middle class toil away for their money, pay more in taxes the more they earn, and then park their earnings in savings and/or retirement accounts. In the meantime, they receive little or no cash flow on which to live while waiting for retirement -- when they'll live on their meager savings.

Doesn't it make more sense to play by the rules of the rich, and earn more while paying less in taxes?

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Yahoo! Finance User - Saturday, January 3, 2009, 1:49AM ET Report Abuse
- Overall: 3/5
In relation to the individual that one starred give or take three posts down. Sure, RK is off on the inflation, it was an example but it does prove the point that "long term" paper asset investing such as IRA's and mutual funds don't exactly make much sense to those looking for BETTER returns. If you consider inflation is in the ballpark of 4% an most funds and IRA's I see almost beat that if at all. Not to mention mutual funds only work in one type of market generally and for those that blindly invest in these means for retirement, they are the ones generally losing out badly. As RK mentions time and time again, education is the key to wealth which ever means you wish to pursue it. Thing I really want to hit on though are the "tax-free" bank money that was brought into the spot light as "fluff facts". Sure it's a loan, and sure because it's a loan it's subject to interest. Yet your missing the big picture which again I feel is due to a lack of education on these things. Look, say I purchased 100 unit apartment complex for 1 million dollars and through sound management increased it's value to 1.5 million over 3 years. Now in this very simple example I went back to the bank and said hey I want to refinance my 100 unit apartment complex and the new assessed value is 1.5 million. The bank will see this of course and be happy to refinance cause they are getting their money through interest like every other type of loan from a bank or what not. Now of course that's where most people will say, chuckle, or sneer to the side of the other guy. Where he just like they fail to realize the power of doing something like this is over those three years, through proper sound management rental rates have most likely increased with not only inflation but the market sentiment as well. So, when I first initially bought the apartment for 1 million the rents were lower then what they are most likely now unless I'm god awful terrible at management. So, with that being said those now larger rental rates are giving me more money then once before as I pay down any expenses that I incurred when I purchased the complex in the first place thus increasing my net operating income (NOI) so when I finally go to refinance for that larger loan on my complex, the current rents will more then be able to handle the new incurred mortgage payment with the interest to boot. An, if I structured my loan correctly with the bank and was mindful with the deal when I first made it, I'll still be making money at the end of the month with the new higher interest payment. So, that "tax-free bank money" in RK's example as well as mine is indeed tax free because with the first loan as well as the new 1.5 million dollar loan from the bank....I'm not the one paying it, my tenants are with the higher rental rates. On top of depreciation and other tax deductions my returns on this transaction as well as many in the future are limitless so long as i keep managing well. What's nice about real estate in this manner is the better run the property is the more it's worth regardless to a degree the surrounding area. Now currently, I'm no real estate guru yet, an yes I do have a slight bias to much of what Robert says because I do in-fact read and have bought many of his products that he puts out. But the example I gave above is just a small example to a much bigger picture of what is truly capable when you think outside of the box and learn something about what people are saying that are "experts". In this day an age of internet experts seems the title expert can be given to anyone with 2 cents and a reliable internet connection. Do I think RK is an investment expert, NO. Do I think what he's saying has weight behind it, YES. Will I go and dig up some information about what he's said in this article and many like it, course. Honestly, the man is very well off and what ever he's doing to acquire it must not be that hard to do either. An, in my "fooled" mind he makes sense as does he to man
MandarA - Wednesday, September 24, 2008, 3:20AM ET Report Abuse
- Overall: 3/5
Yes I think RK went wrong with inflation rate calculation for sum of 25000 but other than that I liked his approach.I am new to investing and want to keep an open mind.As long as its not illegal there is nothing wrong in learning new stuff and thats what RK is trying to do here. Whats interesting though is all those people here who have thrased his article with negative comments dont have any constructive feedback for newcomers like me..what would help people like me more is better alternatives if you guys have any.
Yahoo! Finance User - Saturday, June 30, 2007, 12:38AM ET Report Abuse
- Overall: 1/5
Here's a spoof kiyosaki title....."To make millions simply invent velcro or high fructose corn syrup"
Yahoo! Finance User - Wednesday, June 13, 2007, 7:08PM ET Report Abuse
- Overall: 1/5
Kiyosaki apparently assumes we dont know how to use a calculator... "in 40 years, $25,000 will probably have the equivalent purchasing power of $250 today"...In order for his statement to be true, inflation would have to run at an average 11.6% a year over the 40 year period. Not likely. Also, the so called tax-free bank money isn't subject to income tax because it's NOT income. It's a loan which must be repaid, with interest mind you. Just more examples of Kiyosaki's 'fluff facts' that he uses to fool people into thinking he's some sort of expert. Judging by the number of people who buy his books, I guess you CAN fool some of the people all of the time.
Yahoo! Finance User - Monday, May 28, 2007, 2:07PM ET Report Abuse
- Overall: 1/5
Robert's general premise is right but he is rating mutual funds in IRA's and pension funds as buy and hold or more to the point "the church of buy and hold". If you time the market which can be done ie, Bob Brinker's great advice, I was out of the market in march 2000 and back in spring 2003. I've pulled money out as necessary for other investments ie real estate or cash flow, So do not be fooled by one sided articles such as these. Though yes he is right by seeing opportunity such as pulling out in 2000 and putting those inflated stock profits in REITS. Now that was a home run. Thanks Bob not Robert.

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