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Robert Kiyosaki Why the Rich Get Richer

Robert Kiyosaki, Why the Rich Get Richer

Finding the Right Business Partner

by Robert Kiyosaki

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Posted on Monday, July 9, 2007, 12:00AM

One of the best pieces of business advice I ever got was "You can't do a good deal with a bad partner."

Having had many partners over the years, I can say that this statement holds true. So I thought I'd offer some personal experiences I've had with partners both good and bad.

All Play and No Pay

The first partner is a former CPA who does spectacular pro forma projections. His numbers on the future viability of a real estate project are always well laid out and convincing.

In fact, after first meeting him and his business partner, a Wall Street whiz kid, and looking at some photos of a property they were interested in and an architect's rendition of what it would look like upon completion, I was sold. I became their money partner.

So far I've done three deals with this pair, and to date, we haven't made a dime. The numbers still look neat and tidy every quarter, just the way a CPA should present the financials. The problem is in execution: The projects never finish on time or on budget. Something always goes wrong, and there's always some kind of drama -- problems with environmentalists, city planners, or banks.

Finally, after years of squabbling, his partner (the whiz kid) left the relationship. The projects of theirs that I invested in are still operating, but to date I haven't made any money on them.

A Complementary Relationship

The second partner is Ken McElroy, a writer and personal friend. My wife, Kim, and I have made the most money with Ken. There are several reasons why:

• We share the same investment philosophy.

We buy, improve, hold, and refinance. We generally don't like selling our properties.

• His expertise makes up for gaps in mine.

Ken owns the largest property management company in the Southwest, and his partner, Ross, is a real estate developer. Both men have nearly 20 years of experience in their respective fields.

Because of Ken's years as a property manager, he has the experience and skill to evaluate the value of an existing property. And Ross has the know-how to bring the reconstruction of properties in on time and often under budget.

• We adhere to the same strategy.

Ken, Ross, Kim, and I like to put our money in, improve a property, bring in better tenants at increased rents, reappraise the property, and then borrow our money out and move the equity on to the next property. We then repeat the process.

A Near-Infinite Return

For example, we put approximately $2.5 million into a $9 million, 300-unit apartment house, and secured a construction loan to improve the property. A year later, due to attracting better tenants at higher rents and a lower vacancy rate, the property was appraised at $14 million.

With the higher appraisal, we refinanced the property with a new loan at a better interest rate, and were able to take out $4 million tax-free. The money is tax-free because it's a loan, not profit. The debt service -- the monthly mortgage payment -- is paid for by the tenants.

With this investment strategy, our ROI is practically infinite. We have no money in the investment, yet we collect a monthly cash flow and still have control over the property. To me, this is better than buying a property, selling it, and having to pay taxes on our gains -- or be in a rush to buy a new property just to avoid capital gains taxes via a 1031 tax-deferred exchange.

(A 1031 tax-deferred exchange gives sellers a certain number of days to move money from a sale into another property and defer paying taxes on the gains. The process is more complicated than it sounds, which is why I strongly recommend using an exchange agent to guide and assist you in the process. Most real estate brokers can recommend an exchange agent if you live in the United States; other countries have different rules.)

Lip Service

Finding a great partner like Ken is similar to finding a great husband or wife -- you have to kiss a lot of frogs before you find the prince or princess of your dreams. I don't know of a magic formula other than to keep kissing.

My rich dad often said to me, "You need to be a good partner if you want to find a good partner." Obviously, this is as true in business as it is in love. In my opinion, the best way to begin is by looking in the mirror and asking yourself, "What do I bring to the table? Am I the kind of person I would want to do business with?" It's important to evaluate your strengths and weaknesses honestly.

One of the reasons Ken, Ross, Kim and I do so well together is because we all love real estate; we complement each other in terms of our individual strengths and weakness; and we're all adept at raising money. We make a good team because there's synergy between us, and synergy is money.

A Way Out

My most important partner is my wife, to whom I've been married for nearly 21 years. When Kim and I first met, I was deep in debt from a disastrous business partnership. Regardless, on our first date I asked her, "Do you have a problem with being rich?" It's tough to get rich if your partner doesn't share that goal, and I would never have become rich without her.

That brings me to my next point: All partnerships should have an exit strategy. My partner Donald Trump says that married couples should always have a prenuptial agreement. True, a prenuptial is important if one partner is much richer than the other before marriage, but Kim and I don't have one. Instead, we have our own corporations that we control independently.

Still, Donald is right: The best time to think of an exit strategy is before becoming partners -- that is, after you've kissed a few frogs and have found your ideal business companion. But remember: They sometimes turn back into frogs, and you can't do a good deal with a frog.

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  • Alice - Wednesday, September 5, 2007, 12:07AM ET  Report Abuse

    • Overall: 5/5

    He has taught many things, but you can't expect "little or poor minded" people to understand. Unless you have the millions he has, shut up and listen!

  • Yahoo! Finance User - Tuesday, August 21, 2007, 6:41PM ET  Report Abuse

    • Overall: 1/5

    You had a good artical until the last line. Please don't insult frogs

  • Hockey - Friday, August 17, 2007, 3:25AM ET  Report Abuse

    • Overall: 1/5

    The first sentence is excellent advice. The rest of the article is just sharing personal experiences and thus illustrating his first sentence. But he does not offer advice on how to find a good business partner. A missed chance.

  • Samson B - Thursday, August 16, 2007, 10:39AM ET  Report Abuse

    • Overall: 4/5

    RK is on the mark. I just wish he stops glorifying trump.

  • sevenedge - Wednesday, August 15, 2007, 9:24AM ET  Report Abuse

    • Overall: 4/5

    I wonder if Mr. Kiyosaki reads these comments. I wish he would leave some feedback, but he may just think that would be the catalyst of an endless cycle of arguing. I can see the points of everyone, but in truth he makes some great points. There is no cult here, this is not the Rocky Horror Picture Show. This is yahoo finance, and you people throw rocks like you are in an international think tank. Remember where you are! has anyone even though to thank Yahoo for this free service? They have a wealth of free knowlege to all here and you muck rake the help. Most of the truly wealthy people I am acquainted with won't even talk about business, so why not listen to the ones that will? Many people want to keep it elite..honestly, I make under 100k a year, put too much trust in my pension and 403b, and make a lot of financial moves that people would call me a financial amateur for, but from reading columns like this i am now practicing out-of the box thinking. So thank you for instilling that in me and a lot of others like me who were dragging the conservitive ball and chain around, Robert. And all the bashing needs to stop, as it does nothing for anyone. If you want to be upset... 1.Fed chair said mortage industry was contained and safe (yeah right) 2.Oil is still posting record profits eventhough we pay 2 dollars more a gallon than in 2000. 3.WW4 is on the horizon and we are more worried about our wallets. 4. i still have to press 1 for English. ha!

  • Momma - Sunday, August 12, 2007, 5:46AM ET  Report Abuse

    • Overall: 1/5

    RK lies on many accounts and even admitted to it on this interview when asked about previous real estate deals. I'm only a teenager but I see the facade he puts on and the truth behind it all. He makes people believe that he is an expert because he had a couple million, so what? I know a lot of parents with a couple million who hold down real jobs and went to college. (something RK thinks is unnecessary) Seriously, he made most of his current worth selling his books, tapes, and seminars. I used to love this guy, but after a while you can tell he's fake, because what advice have he ever gave to us? EVER?

  • Yahoo! Finance User - Friday, August 10, 2007, 12:36AM ET  Report Abuse

    • Overall: 4/5

    I'm not sure burntbutter has tried anything in real estate. Though I haven't gotten to any multi-million dollar deals, I can vouch for the fact that buying a junker at 50% below market value, fixing it up, and then refinancing at the new appraised rate, works. RE is the second oldest business in the world and based on today's financial markets (dow down almost 400 points today!), one of the best areas of investment to be in or to be getting in right now. But keep on believing what you want and whatever you do, don't invest in real estate! Leave it to us brainwashed drones. JTH

  • DonaldW - Thursday, August 9, 2007, 10:24PM ET  Report Abuse

    • Overall: 5/5

    These people with all the hate are either followers of a loser that carries a small following or are people that are too scared to take the risk that makes one successful.

  • Yahoo! Finance User - Tuesday, August 7, 2007, 9:15AM ET  Report Abuse

    • Overall: 4/5

    I'm always perplexed at how many people are microscopes looking for any and all flaws. Great personal experience from Mr. Kiyosaki. Someone who has actually been there and done that...

  • Yahoo! Finance User - Thursday, August 2, 2007, 10:53PM ET  Report Abuse

    • Overall: 5/5

    Great Advice!!! The only reason people are so critical is because they've never done it and never will! Kiyosaki's books have completely revolutionized my life and I will continue to listen to whatever he has to say.

  • Yahoo! Finance User - Thursday, August 2, 2007, 3:30AM ET  Report Abuse

    • Overall: 1/5

    I see what's going on with this quack now, he has some kind of frog fetish. All of these RK drones are so brainwashed it isn't even funny. He could tell them to buy real estate in northern iceland right now, and they would all jump on it. I think even a six year old could spot his rantings as total bunk. This article is hilarious. Ya, I bought this 9 million dollar place and fixed it up, then the bank gave me a loan back on the full appraised value, no questions asked. Give me a freakin break. How stupid do you think we are? I can't believe anyone would believe a word this used car salesmen is saying. Fire him now Yahoo!

  • __A_YAHOO_USER__ - Sunday, July 29, 2007, 12:31PM ET  Report Abuse

    • Overall: 5/5

    Great point. AAA

  • Lee - Friday, July 27, 2007, 5:32PM ET  Report Abuse

    • Overall: 3/5

    Seriously - The critical comments here are pretty sad. RK is simply trying to provide advice to people who are trying to better themselves, teach them what entrepreneurship requires, etc. I can understand why he does not provide a lot of specifics sometimes simply because there is no formula to anything; what works for one person may not work for another. The best way any individual is going to learn is by getting out there and begin walking the walk.

  • Yahoo! Finance User - Sunday, July 22, 2007, 11:10PM ET  Report Abuse

    • Overall: 2/5

    First thing that alarms me "The first partner is a former CPA who does spectacular pro forma projections." Former CPA. No one is a former CPA unless they had their licensed revoked. They may have an inactive license, but I guarantee they don't call themselves former CPA's. Former CPA probably means they were charged with a crime or improper conduct and lost their license forever (think of disbarred lawyer, same concept). This is coming from a CPA, do you really want to be entering a business relationship with someone like this. Now the "A Near-Infinite Return", I know what he is ultimately getting to, and I agree with the concept of refinancing to cash out to get your money back (or take out excess), and invest elsewhere, however his math just doesn't seem to work, just hear me out. Say you have 9MM in this project and get a construction loan for say 1MM (3K a unit) that gets you to 10MM (2.5MM is out of your pocket). Now you refinance at an appraised value of 14MM, a bank is not going to refinance all 14MM. Even if the give you 90% LTV, that means they give you 12.6MM. So 12.6MM less 7.5MM in loans (6.5MM original loans 1MM in construction loans) that leaves you with 5.1MM cash out. But 2.5MM is just repayment of your original investment. So that gets you 2.6MM in takout cash (tax free). Now say you go to 80% LTV (thats 11.2MM) that leaves your take out cash at 1.2MM. Now I'm not saying that take out cash is shabby, but I'm hard pressed to get to this 4MM in profit he is claiming.

  • Yahoo! Finance User - Saturday, July 21, 2007, 1:02AM ET  Report Abuse

    • Overall: 1/5

    Was the 350 apartment house the one in Flagstaff, Ariz? in the rich get richer article? anyway..ROI infinite? the housing bubble is over.

  • Knoble Knight - Friday, July 20, 2007, 2:40PM ET  Report Abuse

    • Overall: 1/5

    azulstreak has no life. Why don't you make a new name to prove me wrong. LOSER! Maybe I'll hire you once (if) you get out of college.

  • Yahoo! Finance User - Friday, July 20, 2007, 12:31PM ET  Report Abuse

    • Overall: 5/5

    Wow America is in deep trouble if: creating your own destiny, being a leader not a follower, listening to other's advice but not following your life by what others say, or not believing 100% everything you see and hear, but putting together your own plot based on all the information you assimilate, walking your own path, being in control of your own life, looking at the big picture and stop focusing on what's not the point, changing your perception of things/life, or USING YOUR BRAIN your most powerful asset to think for yourself, are ALL turning people into "RK" zombies then we are definitely in trouble! I think I better Stop reading and listening to this guy and all the other people that tell me that's the smart way to live life...I wonder where i'll be after college then?

  • Tammy - Friday, July 20, 2007, 9:32AM ET  Report Abuse

    • Overall: 1/5

    Pullleeeeeeseeee !!!, lets see some documentation of this apartment deal. U sling it with the best of em Robert !!

  • Yahoo! Finance User - Thursday, July 19, 2007, 2:01PM ET  Report Abuse

    • Overall: 1/5

    Wow RK has his zombies all over the board here. he must be plugging another book. Or a get rich on foreclosed property seminar.

  • b - Wednesday, July 18, 2007, 2:57PM ET  Report Abuse

    • Overall: 5/5

    Wow you’re the perfect example of a small minded person. Let me explain something to you. Do you understand one of my main points in my comment, be a LEADER not a FOLLOWER and listening to advice is extremely wise but you shouldn’t live your life by everything you hear, see, and read. Robert does not actually say “hey kids drop out of school, that’s the way to go” instead he encourages people to get an education just a different one from the traditional “train humans to become employees.” In the book “Why We Want You To Be Rich” he actually insist majoring in accounting and learning the business laws, guess what’s my major…but I didn’t decide to become and accountant because of Robert Kiyosaki, I did because of my mom (smart advice), asking others, and MY OWN RESEARCH before I made my decision. You see I made the choice because of gaining as much knowledge as I felt was best for me not just because of other people’s opinions. I’m using my major as a way to learn as much possible though I do not wish to pursue ever actually opening an accounting firm because there are much other ways to leverage myself and simpler ways to get out of the 90% of the US “fighting for money” population; I want out that rat race, just like millions do. Now let me bring to your attention that even if Robert was to or actually did say “hey kids school is for losers you don’t need it drop out…” would I listen? Would you listen? I know I wouldn’t because in my opinion that doesn’t seem smart at all. But I wouldn’t automatically block out and think everything Robert says is BS. No, I just wouldn’t agree with that, because then he might say something excellent like building business is something that should be in your heart, or with a team for support and etc. The point is I’m not just a drone with out a brain, I have one, my most powerful asset that is and I’m using it. So the smart thing to do is to read on all different points of views and advice and come up with my own Magic Formula. What worked for them might not work for me you understand? By the way did you ever take a second to actually read the bio’s on the top 10 richest people in the world? If not, one place I like to read is Forbes.com; self-made, investing, or inherited is how the rich became rich. Check how many dropped out of school. And there are many billionaires that did not finish school, the 8th richest man in the world Amancio Ortega from Spain didn’t even finish high school. But would I follow them NO WAY I enjoy going to school but it just wasn’t for them. It was something I considered though, “why am I in college if the richest men in the world didn’t go or finish,” after much thought I felt and still feel it is the best place for me and I do not let others choose where I go in life. What most people are looking for is some how-to-get-rich-quick-scheme or you want the rich to tell you 100% exactly the secret formula, but the truth is would all their advice work for you. Would investing? Would real estate? Would Business? Would what work for you? As far as real estate did you ever stop to think why Donald Trump might be unwilling to tell you 100% every secret…By doing so he would train his competition to potentially become better than him, you might end up beating him to the area of land he was planning to build his newest resort on, therefore he could miss out on Millions. Now that wouldn’t be a smart move for Trump now would it. Point blank, Robert succeeds because he gets people to OPEN THEIR EYES and he tries to prevent people from being closed minded. Even if 100% of everything he says is false or made up the point is he can still get many to open their eyes through stories that may be true or false, it really doesn’t matter. Stop focusing on little things and focus on the big picture! Take in knowledge from all angles and assimilate them to form your own plot and create your own destiny stop relying 100% on what others may say or tell you to do -Azulstreak6

  • Yahoo! Finance User - Wednesday, July 18, 2007, 12:50PM ET  Report Abuse

    • Overall: 1/5

    So Robert, Help me out on your near infinite Return example here. The key missing bit of information that you fail to mention is the amount of the construction loan that you took out for your 300 unit property. I am guessing that it was somewhere around 5 million dollars. By not stating the construction loan, it lets you wiggle around the amount of money that a future banker will let you take out of the property. Let me rephrase the chain of events, so I too can follow in your footsteps. Although I guess I should be treading lightly. You say you wrote a check for 2.5 million dollars to purchase the 300 unit property with a sales price of 9 million dollars. That means that you got a banker to give you a mortgage loan on the balance of 6.5 million dollars at a high interest rate. That is based on a valuation of 30,000 dollars per apartment. 30K times 300 equals 9 million dollars right? . So on Day one of the sale, you provide a 28 percent downpayment for the apartment complex. 2.5 divided by 9 equals 28 percent. That seems very reasonable to the banker, your money is in the project. Now on day 2 you take out a construction loan for, I am saying 5 million dollars, to spruce up the property, paint, carpets, maybe even new windows. Certainly not adding in a pool, right? Even 5 million dollars does not go very far when you are talking about rehabbing 300 units. So now on Day 3 you are paying interest on 11.5 million dollars on two mortgages for the property. This construction goes on for a year, and you manage to raise the rents on everybody ,while they are getting construction dust and paint drops on their fine furniture, and you manage to stuff some more paying residents into the empty units. You are also continuing to service those mortgages over this time frame. Now you bring in your favorite commercial real estate appraiser to let everyone know how much the building is really worth now. The appraiser magically says that the building with all of its renovations is now worth 47,000 dollars per apartment or 14 million dollars in total. Now the tricky part is coming up. You have to find a banker that is willing to give you a mortgage for the total value of the apartment complex. In order to get your money out of the deal, you have to show this new banker that your cash flow from the new rents is absolutely going to cover your mortgage payments. Over the life of the loan. Thats a hard point to sell to a mortgage banker. His inclination is to have you keep your money in the building, so that you do not run away on his investment. You have to be awful slick to have him to write you a mortgage for the full 14 million dollars. Look at it the bankers way, he wants you to stick around and make sure those tenants are still happy to keep paying their new rent increases each month. Lets assume that you have found a banker dumber than you to write you a mortgage for 14 million dollars now, and that at least in the short term you can cover the mortgage payment right from the rental checks. So you have converted 11.5 million dollars of debt plus your original 2.5 million dollars downpayment into 14 million dollars of debt. Now you have back your original investment of 2.5 million dollars to spend seemingly on a new Lamborgini tax free, but that was already your money. You could have bought your Lamborgini last year with your same downpayment. So please explain next time where you were able to take 4 million dollars out of this apartment complex, I am seeing you just barely breaking even here, and really exposing your capital for the year to real risks.

  • Yahoo! Finance User - Tuesday, July 17, 2007, 11:56PM ET  Report Abuse

    • Overall: 1/5

    Haha, the 5-star raters are funny. Azulstreak6 - Robert thinks college is a waste of time. Maybe you should drop out if you really believe in him. Pip, you make 10 mil? I think I smell a liar!

  • russ - Tuesday, July 17, 2007, 5:24PM ET  Report Abuse

    • Overall: 1/5

    I showed this column to a real CPA and he asked me if it was some sort of a prank...that no one could seriously write such nonsense.

  • pipsnatcher - Tuesday, July 17, 2007, 5:02PM ET  Report Abuse

    • Overall: 5/5

    The Bible says there will always be the poor among us. You can tell from the remarks of some individuals who they are. I am shocked to hear so many people make sad comments like some I have read here for these articles written by Robert Kiyosaki. Most of these people have never even tried to apply any of the priciples to prove or dispove them when they just go out to bash every article written simply because they do not like Robert's point of view (which in my opinion are normally right on the money). Firstly the person who stated that he bought his lunch with his credit card has absolutely missed the point. I borrow money to invest primarily. Also, the suggession that "infinite return" is flawed has some ground to stand on however when we calculate it we understand that it is correct. If you use $2.5M to make you $5M (which if reinvested given the same unique situation) makes $10M which makes $20M ......etc we see how the returns on the initial investment zooms to infinity theoretically and that is not taking into account the cashflow generated on each and every unit rented less the mortgage, utility, management etc. Since I have been putting the priciples of Robert Kiyosaki into practice I have seen my income jump from 6 figures to 8 figures! So you do the maths, sit on your asses and laugh at something you have not even tried and stay the same POOR, IGNORANT SNOB you are. Or you could try something new and enjoy the freedom from the RAT RACE you are now in. Successful people do what unsuccessful people are unwilling to do. If you keep on doing the same thing you will keep on getting the same results!

  • BryantL - Tuesday, July 17, 2007, 11:00AM ET  Report Abuse

    • Overall: 5/5

    Excellent work Robert as usual. I’m an extremely young entrepreneur not even out of college yet and enjoy reading and listening to everything you say. You have greatly helped to steer me in the right direction and I’m already making money in building an asset, something I would have never thought to do. I think I speak for most teens my age that are familiar with you that, we are fortunate that there are people like you that continue to educate and open people’s eyes to see most of what we are taught in schools will not give us the life we all dreamed of as children, to get to where you really want to be in life you have to learn to develop, educate, and work on yourself then teach others to do the same and build together. Not become employed and work for some else who you live in fear of losing your job because you have NO CONTROL over your life, I know I’ve always wanted to RULE MY OWN DESTINY not follow. Be a leader not a follower is what I was always told, and I’m doing just that. It is extremely wise to take advise from people that have made it in the direction you plan to be heading, I plan to be rich so I listen and read up on rich people. You happen to be one of my favorites because you are what would be considered a radical, you want change and the public never excepts change just take a look at history and past radicals that influenced the world today (Martin Luther King Jr, Galileo, Gandhi, Christopher Columbus, etc. the list goes on). The point is the world is ever changing and we should learn to see these changes or opportunities as some might call them and go with them. We no working at a job and simply working hard is not the key to wealth (in my opinion wealth = freedom, my reason to become rich) simply because take a look around you we all know people that have worked hard all their lives and it hasn’t gotten them where they wanted to be for example my mother she’s worked hard all here life and she complains all the time just like millions of people do about how she is not appreciated for all the work she does for her boss on her job, the complaints was enough to change my mind about ever getting a job. However just like my mom she is plugged into this system in which she feels she needs a job, she wants to leave but thinks she can’t; and what does she do gives me advice about getting a good job after college and being successful. I can’t take her advice because I don’t want to be where she is when I’m her age I want to be where you are at my age and all the other rich people out there, so I listen to you guys instead, but are of the person I most relate to. It’s as simple as this, you want to be an actor you read about actors and there success and their failures, you want to be a football player you read follow and do what they do, you want to become rich read and familiarize yourself with what they do. It’s as simple as that! Forget all the criticism and all the crap people say because misery loves company and if you listen to them you will become one of them. People say what they want about anything but you will only know if it is right for you through experience don’t let what people say hinder your judgment, be grateful for advice but don’t live your life by it, what’s good for one person may not be good for another. So critics keep writing but you’re loosing a battle, Robert is successful and he is helping people out there, it may not be you but someone else. Even if he has 99 haters and 1 person for every 100 people, the point is he helped someone. Thanks a lot Robert Kiyosaki and you have much respect from someone from a much younger generation. Keep on writing please

  • Yahoo! Finance User - Tuesday, July 17, 2007, 12:35AM ET  Report Abuse

    • Overall: 1/5

    "Near Infinite Return", 200% return in a year is good, but it is not close to infinity. Does he think he'll get this apprecaition every year? This strategy is flawed. Bobby also tends to make the obvious into a huge benefit. All loans are tax-free. Today I bought my lunch with a credit card, TAX FREE! To the RK cult: 1-star raters are critical for a reason. Stop being closed-minded

  • Michael M - Monday, July 16, 2007, 11:12AM ET  Report Abuse

    • Overall: 1/5

    "His expertise makes up for gaps in mine"...This is the reason RK is making money in this partnership.

  • Joseph - Sunday, July 15, 2007, 8:25PM ET  Report Abuse

    • Overall: 1/5

    Another bad article by Bobbie. Many of the posters here have some misconceptions about both borrowing and paying back loans. Neither borrowing or repaying the loan amount is taxable. You can only deduct the interest paid on the loan and not the principal paid. The principal repaid is not income and is not an expense, it is just a repayment of debt. This is just the same as your home loan. You can deduct only the interest paid each year and not the principal.

  • Belt of Truth - Sunday, July 15, 2007, 4:33PM ET  Report Abuse

    • Overall: 4/5

    Right on Robert. God Bless you!!!!! And please, no exit strategy with you life partner. May your marriage be blessed!

  • Warin - Sunday, July 15, 2007, 12:39PM ET  Report Abuse

    • Overall: 5/5

    RK, keep on working. Average investor would never understand what you are going to tell them

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