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Robert Kiyosaki Why the Rich Get Richer

Robert Kiyosaki, Why the Rich Get Richer

Think Rich to Lower Your Taxes

by Robert Kiyosaki

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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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598 Comments

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  • Michael - Saturday, May 26, 2007, 11:18PM ET  Report Abuse

    • Overall: 4/5

    Very interesting. I've always thought the whole IRA/401K/ deal was questionable. If it's so great, why do they shove this at people? I mean, Fidelity sends out handy dandy forms so you can dump money into your IRA, and *ever* column you read in those GetRichQuick magazines like money constantly ram home the point, with the happy couple all squared away for retirment cuz they are maxing out their 401k blah blah. RK is probably the only voice of reason and caution for the vast sheep out there, herding thoughtlessly into lousy investments which serve mainly for the investment houses to get richer.

  • vadim - Monday, May 21, 2007, 3:32AM ET  Report Abuse

    • Overall: 5/5

    Thank you Robert !!! your books changed my life and a lifes of some of my friends , and now i look differently on how to make money !!! God bless you richly !!!

  • Yahoo! Finance User - Friday, May 18, 2007, 1:50PM ET  Report Abuse

    • Overall: 1/5

    I like the way Bob says that the $100K allowed him to BORROW $20M and then asks how long it would take you to SAVE $20M. Bob, you did not save that money, you HAVE to pay it back.

  • Yahoo! Finance User - Thursday, May 17, 2007, 12:20PM ET  Report Abuse

    • Overall: 1/5

    WADE COOK wannabe, why do you R.K. followers think that he is so original. Investing in Real Estate has been around longer than any of us. This is nothing new so stop thinking R.K. is so smart. He is a man with one bullet in his gun. Had he taken and diversifed into other investments including Mutual Funds for example his wealth would be 10 fold from where he is today. R.K tells hald truths and only the educated and people with real experience can see through this guys B.S. that he is selling.

  • Yahoo! Finance User - Thursday, May 17, 2007, 1:34AM ET  Report Abuse

    • Overall: 1/5

    This guy is an idiot, and probably pretty dishonest, too. For example, he assumed an inflation rate of 12% so he could say $25000 would only be worth $250 in spending power after 40 years. That's ridiculous. Since 1950, inflation has averaged 4%, so $25000 would be worth $5200. He probably confused inflation with (optimistic) expected stock market returns. I could go on about the other foolishness in the article, but I think it's clear this guy just likes to talk big. I wish him continued good fortune with his real estate investments, but I wouldn't recommend taking a lot of his advice at face value.

  • Heroine Worshipper - Wednesday, May 16, 2007, 5:38PM ET  Report Abuse

    • Overall: 5/5

    The inflation figure is based on value, not buying price. In 40 years a $1 million house will easily sell for $100 million but be equally as valuable. A $40 DVD player will still cost $40 but be 1/100th as valuable.

  • marcus - Wednesday, May 16, 2007, 12:30PM ET  Report Abuse

    • Overall: 5/5

    Thanks for routinely pointing out alternatives to routine ideas pushed by investment co.'s and media. Your books and articles have already been quite helpful in planning for retirement with more cash flow.

  • D&T - Tuesday, May 15, 2007, 5:06PM ET  Report Abuse

    • Overall: 5/5

    I know what Robert means when he said people are looking for specific what to do advice... They do not want to learn how to fish but to receive a hand out of a fish... soon they will look for more fish to eat. I have been paying attention to what Robert had to say and when you start getting it and appyling to your fianancial life, it slowly helps you to get it in a different level. It is inspireing to me. Thank you!

  • Yahoo! Finance User - Tuesday, May 15, 2007, 3:12PM ET  Report Abuse

    • Overall: 4/5

    Maybe somewhat exaggerated but nails the bulls eye in illustrating the point

  • Mark - Tuesday, May 15, 2007, 1:25PM ET  Report Abuse

    • Overall: 3/5

    All the folks critiquing the inflation comment do not understand RK's "exaggerating, but not really" tone- the rise of the global markets, irresponsible FED and politicians behavior with dollar printing, and declining fundamental value of a baseless currency

  • Terry M - Tuesday, May 15, 2007, 11:55AM ET  Report Abuse

    • Overall: 5/5

    Once again... Robert...you are on it! The "rules" of the game are designed for the "wealth builders" (ie real estate, stocks, gold, etc) and NOT "the ones that are building wealth for someone else" (ie employees, 401ks, mutual funds, etc). Thanks for the insite!

  • Yahoo! Finance User - Tuesday, May 15, 2007, 10:56AM ET  Report Abuse

    • Overall: 5/5

    Right on, man!!!!

  • Yahoo! Finance User - Tuesday, May 15, 2007, 10:39AM ET  Report Abuse

    • Overall: 5/5

    It's about time people who work so hard for their money learned to use it to work for them and not to pay an extreme amount of taxes. The poor people keep this country going and they die poor.

  • Yahoo! Finance User - Tuesday, May 15, 2007, 9:23AM ET  Report Abuse

    • Overall: 5/5

    For goodness sake! The government takes too much money from us. Why shouldn't we learn to pay less?

  • Yahoo! Finance User - Tuesday, May 15, 2007, 9:05AM ET  Report Abuse

    • Overall: 5/5

    You guys just don't get it, do you? You just don't get it. Robert can talk until he's blue in the face and you just plain won't open your brains to see that YOU are the victims of this economy. Instead, you take out all your anger on Mr. Kiyosaki. He's not the one who makes gas prices go up. He's not the one who makes people take out adjustable rate mortgages. If people had paid attention to what he was saying five years ago, they would all be better off. Please empower yourselves or, at least, lay off Mr. Kiyosaki.

  • Yahoo! Finance User - Monday, May 14, 2007, 2:56PM ET  Report Abuse

    • Overall: 1/5

    The details of this article have already been successfully and properly picked apart by prior posts. However, I would like to add that the entire premise of this article is completely off the mark as well. The wealthiest 1% of Americans pay over 1/3 of the nation's taxes...more than the bottom 90% of Americans pay. So much for the rich not paying taxes. Additionally, as a practicing CPA, I recommend that Yahoo include a tax advice disclaimer (i.e. circular 230 notice) following RK's columns in addition to the investment disclaimer already included. Allowing someone with as little knowledge of the code as RK to give tax advice could potentially give them some legal exposure.

  • Todd - Friday, May 11, 2007, 9:48AM ET  Report Abuse

    • Overall: 2/5

    This advice seems unbalanced. Basically, the author is promoting real estate investing over investing in financial markets. But, in all his writing, he never seems to balance his discussion with the risks of real estate investing. I am not say real estate investing is bad - but he makes it sound like easy money. Also, read this quote "The $100K eventually allowed us to borrow $20 million from banks tax-free. How long would it take you to save $20 million?" Heads up folks - that is a $20 million LOAN that you have to pay back. It is not a return.

  • Yahoo! Finance User - Thursday, May 10, 2007, 11:22AM ET  Report Abuse

    • Overall: 2/5

    I just wonder what will happen to the economy and the country itself when everyone is "rich" and nobody is paying any taxes.

  • Daryl - Thursday, May 3, 2007, 2:27AM ET  Report Abuse

    • Overall: 1/5

    I guess he was too predisposed with the supposed market crash he predicted in his previous article to do any logical research before he wrote this one.

  • Yahoo! Finance User - Tuesday, May 1, 2007, 4:24PM ET  Report Abuse

    • Overall: 1/5

    "I estimate that in 40 years, $25,000 will probably have the equivalent purchasing power of $250 today." I'd really like an explanation on this one. This assumes inflation over 12% per year? I wonder if this is just I joke I somehow missed. As far as the rest of the article it is actually fine, alot more difficult to get going than he implies but not a bad idea overall. The issue I have other than the preceeding is the lack of new content, he's said the same thing for years. A bit of a one trick pony, and I'm bored.

  • Margaret - Tuesday, May 1, 2007, 12:42PM ET  Report Abuse

    • Overall: 1/5

    This is not geared to the average investor who would never take such risks!

  • Yahoo! Finance User - Monday, April 30, 2007, 11:35AM ET  Report Abuse

    • Overall: 1/5

    There are so many holes in this scenario it looks and smells like Swiss cheese that has been left out too long. If they are getting $100,000 cash flow and are receiving depreciation to further shelter that income why are they not receiving phantom income from the ammortization of the loans. When you borrow this heavily and leverage this far ( $ 20,000,000 (bull cr...) you are taking incredible risk that can turn around and bite you big time. I find it very annoying when "experts" are put in front of the public and tell such incredible whoppers. This kind of misleading advice can get people in a lot of trouble.

  • Yahoo! Finance User - Sunday, April 29, 2007, 9:36PM ET  Report Abuse

    • Overall: 4/5

    I'm so glad more people don't listen to this kind of advice! I love my tenants. Gee and don't forget almost 90% lose money in the markets.

  • Paige - Friday, April 27, 2007, 4:18PM ET  Report Abuse

    • Overall: 3/5

    I liked the article, but does anyone want to comment how Robert can get a 20% return on a down payment of $100,000 when his morgtage would probably be (at least) a million? Or maybe I'm missing something.

  • Bryan - Wednesday, April 25, 2007, 9:14PM ET  Report Abuse

    • Overall: 5/5

    The point of this article is well taken. Hopefully, the bankers logging negative comments on here are hiding their $$ under their mattress so they don't loose it.

  • roberts - Tuesday, April 24, 2007, 11:46PM ET  Report Abuse

    • Overall: 5/5

    Love this guy!!! God bless you Robert!!! I try to apply everything he teach in Poland which became a very hot real estate market after Poland joined UE

  • Yahoo! Finance User - Tuesday, April 24, 2007, 8:50PM ET  Report Abuse

    • Overall: 1/5

    Kiyosaki writes: "I estimate that in 40 years, $25,000 will probably have the equivalent purchasing power of $250 today." This dope apparently doesn't know how to do basic financial calculations. It would require inflation to average more than 12% per year for the next 40 years to cause a $250 item today to cost $25,000 in forty years. Considering that inflation has consistently been in the 3% range in the past quarter century, I would like to see where Kiyosaki comes up with his "estimate". Could it be that he simply doesn't know what he's talking about?

  • Kevin - Tuesday, April 24, 2007, 7:24PM ET  Report Abuse

    • Overall: 5/5

    I love KI-YO-SAKI!!!!!!!

  • tonyo - Tuesday, April 24, 2007, 12:06AM ET  Report Abuse

    • Overall: 5/5

    Rich Dad is indeed coaching and he says, "Touchdown!" on this one, Robert. How can the naysayers hold you back when they don't even know the rules of the game. Cash is king? That was last week. The Johnny-come-latelys of the world are slapping on a helmet and shoulder pads when that don't understand that you've already been playing baseball for three innings! They can't stop you and I'm not sure they can even hope to contain you anymore. Keep us posted on the Flagstaff investment. As the Bay Area workforce moves further and further out in the search for affordable housing, this is the kind of move that could pay off huge.

  • Yahoo! Finance User - Wednesday, April 18, 2007, 1:14AM ET  Report Abuse

    • Overall: 2/5

    This sounds very different from the article about the subprime mess, in which you say to hoard cash, which is TAXED. Also, is your "Rich Dad, Poor Dad" book an aleghory? Hawaii, where I've lived, is very small. Many think they would have recognized who your rich dad was if this was true autobiography. Cute idea though.

Showing comments 6-35 of 598<< PreviousNext >>
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