Hello,
I have just finished reading the book Rich Dad, Poor Dad by Robert Kiyosaki and as a result some of the content that he teaches has somewhat confused me.
Firstly he goes onto state that your home is not an asset, because it takes money out of your pocket. The thing is although it’s not an investment property, here in Australia housing prices continue to rise, so the large growth factor I feel is an asset.
Secondly he seems to be very biased towards investing for positive cash flow over growth. I know many investors here on this forum have taken the growth approach and have done very well for themselves, so when he says that investing for growth is a sure recipe for disaster and a complete mistake, it really confuses me because it goes against what many people here talk about.
For those of you that have read any of his books, what do you think?
Cheers
There's many ways to skin a cat and there would hence be many ways to invest in an attempt to break free of the 'rat race'. Personally I don't look at books as strict guides on how to invest, but rather they provide readers with options and the pros and cons of each. It is ultimately up to the reader to decide what they intend to achieve by investing and what sort of risks they're prepared to accept.
Robert emphasizes the importance of passive income, the ability to earn money without actually working. This is good, because let's face it: if not for the need to make a living, most people wouldn't want to work as much as they do now. In my mind then, passive income means buying cashflow positive property.
I've taken the negative gearing approach, albeit unintentionally. This is because I wish to buy properties in areas that I would personally live in. To put it bluntly, it's very difficult to find a 'nice' house in a 'nice' area that is positively geared (if someone knows of such an area I'd hope for them to PM me with the name of the suburb), unless you take a very small loan or bought a long time ago. Being young and still living with parents, I've opted to be a bit more aggressive and aim for growth. Eventually I could always clear my portfolio or refinance to buy property with a higher yield to balance things out.
fWord wrote:There's many ways to skin a cat and there would hence be many ways to invest in an attempt to break free of the 'rat race'. Personally I don't look at books as strict guides on how to invest, but rather they provide readers with options and the pros and cons of each.I think that’s that a very good point. I like to read Kiyoaski’s books for the investor mindset content- I don’t take too much away in regards to the property investing because I feel the market he operates in is very different to the Oz market.
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GameTime wrote:Firstly he goes onto state that your home is not an asset, because it takes money out of your pocket. The thing is although it’s not an investment property, here in Australia housing prices continue to rise, so the large growth factor I feel is an asset.
Secondly he seems to be very biased towards investing for positive cash flow over growth. I know many investors here on this forum have taken the growth approach and have done very well for themselves, so when he says that investing for growth is a sure recipe for disaster and a complete mistake, it really confuses me because it goes against what many people here talk about.
The real answer to both of these is time. People assume that because a PPOR house is a an increasing capital gains tax free asset .. that they are making money on it. This is true .. but its also a lie. You are holding onto an asset you bought in yesterdays dollars, paying todays premium to keep it, and selling it in tomorrows market. And until you are actually selling or leveraging against it .. its worth nothing to you. And for a single doubling boom .. you have at least a 10 yr wait.
As was once pointed out to me at a coin show, a rare coin went from $400 in 1965 to $35,000 in 1995. I then suggested the bleeding obvious .. that there was a 30 year gap in the middle. So unless you were 15 when you bought this coin … you'd been waiting a long time for a result.
Thats really why Kiyosaki goes on about a prime residence not being an asset. Its a place you pump a lot of money into, hold onto over and above a normal investment timeframe, and then expect it to return rewards for you. However, on that same note .. all those people who hold onto their prime residence and dont sell .. keep the market requiring properties, and in turn .. boost the price for all concerned.
Again .. with the growth path .. its a way to get rich .. yes. But again .. it requires a period of time … (you see where this is going?). I'm sure you never went to the grocer and he says .. carrots? I'll have some next season .. you want to wait? It sounds like a laughable scenario, but this is EXACTLY what people expect from property. Wait, and it will all come good. Sure, but … how long to wait? Positively geared properties .. on this note .. are producing an income and return from day one. There is no wait .. there is no negative debt downside, there is only a return.
I’ll be the first to admit that I haven’t read it (or any) of this genre of books – nor do I intend to either.
Your home/ppor is an asset, you can leave it unencumbered/do nothing (passive investment) or leverage it & make it work for you ie not just capital growth & cgt free.
Your IPs, your choice: cap growth or income? Income is the instant gratification (you could liken it to a bank deposit account paying weekly interest), cap gain is delaying your profit but also increasing the risk of no profit or cap loss if markets turn/you have paid too much.
Hey GameTime,
Just to reinforce what other people have been saying, the US property market is very different to the australian property market. For example, here we have negative gearing tax benefits. These don’t exist in the US. Unfortunately for us, this seems to have made investors more willing to pay a higher price for a property which may have a lower rental yield.
Robert’s strategy in his book encourages people to minimise risks associated with capital growth expectations. His ideas make sense from the point of view that if you find a property that has a good rental yield, one that would provide interest coverage (very hard to find in australia) then you can go out and buy with the confidence that you will not loose money, even if the value of the property goes down at some stage.
The other thing is that when Robert mentions an asset, he means it in the accounting sense of the word. A house is not an asset because if you purchase it on a mortgage you owe that money to the bank and the house itself generates no income.
GameTime wrote:Firstly he goes onto state that your home is not an asset, because it takes money out of your pocket. The thing is although it’s not an investment property, here in Australia housing prices continue to rise, so the large growth factor I feel is an asset.
Secondly he seems to be very biased towards investing for positive cash flow over growth. I know many investors here on this forum have taken the growth approach and have done very well for themselves, so when he says that investing for growth is a sure recipe for disaster and a complete mistake, it really confuses me because it goes against what many people here talk about.
I'm accountant by trade, by definition, an "Asset" can be controlled and provides a future economic benefits. Therefore, is an investment property an asset? Can you control it (e.g., let it), the answer is yes. Does it provide future economic benefit (e.g., capital growth or capital gain or rental income)…the answer is yes. Hence, in accounting term , property investment is an asset therefore it fits in the criteria set by accounting body (e.g. FASB). Once again, property investment is an asset.
source: http://accounting-financial-tax.com/2009/08/definition-of-assets-fasb-concept-statement-6/
When Robert has started investing in the mid 80s, houses in the US are relatively cheap then it collapsed hence he was in the perfect time to take advantage by purchasing bargains. When the market picked up few years latter….almost overnight his value of property skyrocketed due to CG. Hence CG is the catalyst to build wealth but you need cash flow positive to sustain your portfolio just like you cannot continue to keep running your business making regularly losses you need cash injection to sustain it…I think that is his main argument.
Hope this helps.
Hi Guys, Intresting Topic.
I have read a few books by Robert Kiyosaki. I just bought one called retire young and Rich. I read the whole book and i was a bit confused. So i sat down and had a look at the book again. The first page acutally says that this book was written before 9/11 and the GFC. IT was only published this year though.I see my home as an assest i bought it at 24 and know im 26 and we only owe 90k on it. We did this by buying and selling property in the last 6 years i started at 20. I have just bought a bussiness and becasue i didnt owe that much on my home the bank was more then willing me to lend me the money. So to me my home is an assest becasue without it i wouldnt of have been able to purhcase my bussiness and in 6 month i will be working from 60 hours a week to only 20 hours. So this has created me a good life style. I think what we have to look at is every one has different ways of investing i dont think there is a straight out blue print that says this is the way you get rich.
What has worked for you might not work for me.
Great topic
Cheers Johann PsailaJpcashflow | JP Financial Group
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I have recently been rereading some of the Kiyosaki books I have and I love the Cashflow Quadrant one. He has some great concepts and ways of explaining things.
What he says is true. By his definition anything that puts money into your pocket is an asset. Anything that costs you money is a liability. A house costs you money so it would be a liability. But you need to live somewhere, so even though it is a liability doesn't necessarily mean it is bad. It would be better to be paying $500 per week for a house that increases in value than a car that decreases in value, eg.
To get rich you just make sure your assets increase faster than your liabilities.
As for the growth properties – if you kept buying cashflow positive properties you would probably get rich in the long run. These put money into your pockets (until the repair bills come anyway). The trouble is these properties generally are slow to increase in value – not always though.
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If your accountant will prepare your Balance Sheet, he or she will classify the land of your PPOR including its building as an asset. On the Credit side of the Balance Sheet, it will record the liability of your asset (how much you own) under the Bank name (e.g. Creditor). If you have equity (Asset – Liability), it goes into the Equity account of the Balance Sheet as credit entry…hence this is where the DOUBLE ENTRY accounting comes in..DEBIT = ASSET, CREDIT = LIABILITY (How much money you own from the Bank) + Equity (Asset – Liability)…this is the equity you use to fund another IP.
The concept from Rich Dad, Poor Dad only talks about the CREDIT side of accounting (Liability)…because that is the old way of accounting. The new accounting standard is DOUBLE ENTRY accounting…hence it takes into consideration of the Asset side.
To put it simply….if you are new in DOUBLE ENTRY accounting…here it is again
DEBIT (Asset e.g. IP or PPOR) = Liability (How much you own the Bank) + Equity (How much you have paid the loan so far)
or, Equity = Asset – Liability
So if you referring to your House or IP as a Liability, you are only talking about the CREDIT side of the Balance Sheet but failed to discuss the Asset side.
Hope this clears up ANY confusion about Asset which equals to Liability + Owner's Equity…this Equity is what you use to fund your IP.
GameTime wrote:For those of you that have read any of his books, what do you think?
I have read the books and I think there are alot of very valuable lessons to be learnt from them and would recomend them to anyone. They are a great starting point to change your frame of mind on money and life goals, etc.
However, a few things to keep in mind with this genre of book:
– written at a point in time and you need to consider if strategies/advice are still current;
– Kiyosaki is obviously very US centric;
– what 'sells' a book is not always the 'best advice', for e.g. most will attempt to appeal to the 'I dont want to work anymore and earn a passive income' or 'Lets buy 300 properties in 3 months", which is great – but just keep in mind it may be appealing to you emotionally rather than rationally;The specific strategy you choose is horses for courses (cashflow vs growth, property vs shares, wage earner vs self empld) but the underlying sucess factors is what needs to be looked at first, eg, 1) making your finances a priority, 2) having a plan, 3) having it based on quality advice.
Personally, anything by Noel Whittaker I would recomend.
Cheers,
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