I recently re-read Rich Dad Poor Dad, one of the top-selling personal finance books of all time and probably the one book that most real estate investors have credited with kickstarting their journey. Ironically, most of the book doesn’t discuss how to make money in real estate. However, most devotees do acknowledge that this book helped change their mindset about their finances and investing philosophy. Here are some timeless lessons from this classic book that will give you more confidence investing in real assets that produce real cash flow and wealth.
1. Become financially literate
Over twenty years ago, Robert Kiyosaki wrote a brochure as a marketing piece for his financial education board game, CASHFLOW 101. What many people do not know is that this brochure became the basis for the Rich Dad Poor Dad book. Robert is adamant that people need more financial education, especially in our schools. He has been an outspoken proponent for changing our education system so that children can have the opportunity to become financially literate.
The rich understand the difference between an asset and a liability. In simple terms, an asset puts money into your pocket while a liability takes money out of it. Therefore, the rich become richer because they acquire assets while others acquire liabilities. Having large amounts of consumer debt will make it difficult for anyone to gain wealth. On the other hand, using “good” debt (i.e. leverage) to purchase cash flowing rental properties will add value to your asset column.
Capital preservation should be of utmost importance to increase your wealth. Left Field investors know that hard assets such as apartment buildings or self-storage facilities will most likely retain their values in addition to pumping out regular distributions. Forced appreciation will add to their values when sold because of the increased net operating income. Buying publicly traded stocks is a bit riskier because of the ups and downs of the Wall Street roller coaster.
2. Don’t work for money. Make money work for you.
Left Field Investors wholeheartedly agree with these statements. Warren Buffett famously said, “If you don’t find a way to make money while you sleep, you will work until you die.” There are only so many hours in a day that you can work. While not everyone can quit their jobs, at least you can invest and re-invest your money into cash flowing assets to grow your “snowball”. Commercial real estate is a great vehicle for making you money from appreciation, depreciation, and cash flow.
3. Choose friends carefully: the power of association
Real estate investing is a relationship business. At Left Field Investors, we preach networking. Talking with people who have experience in the passive investing world will cut down your learning curve greatly. Jim Rohn said, “You are the average of the five people you spend the most time with.” When Infielders are asked which of the membership tools is the most valuable, they universally respond that it is our private forum where we discuss sponsors, deals, tax strategies, and all things passive. Even though I am one of the founders of this group, I find that I am learning new things every day by getting involved in these discussions.
Connect with like-minded investors. Call up sponsors and ask them questions about their business model and where they think the next burgeoning market is. There are also plenty of Facebook groups dedicated to passive investing. You never know who will help you discover a great tax idea or introduce you to a fantastic sponsor. Network, network, network! I believe we have one of the best passive investing communities at Left Field Investors, so get off the bench!
4. Master a formula and then learn a new one: the power of learning quickly
There are plenty of ways to learn about passive investing: books, our podcast, other podcasts, syndicator websites, and forums. As mentioned above, the Infield membership includes several tools to help you compress time frames and to give you confidence when investing. The LFI Sponsor Summary sheet gives you detailed information on dozens of syndicators. Many of our members have talked with these sponsors so we have been able to compile this data into one spreadsheet. The LFI Sponsor Screener will give you key questions to ask when you interview syndicators. The LFI Deal Analyzer will help you vet specific deals and will light up any cells red if the metrics are not within the target range.
Most passive investors consider multifamily properties to be the “bread and butter” of syndications because of their good cash-on-cash returns and great ability to take advantage of bonus depreciation. But don’t limit yourself to one type of asset. Since real estate is also affected by economic cycles, know which asset types are more resistant to downturns. Left Fielders believe that you should diversify by asset type, by asset class, by sponsor, by geography, and even by time frame. If you invest in stocks, you would not put all of your money into one sector, like health care companies. The wise adage of “Don’t put all your eggs in one basket” cannot be truer in the passive investing world. Follow the advice of Rich Dad Poor Dad and keep on learning.
5. Pay your “brokers” well: the power of good advice
In this section of his book, Kiyosaki was referring to real estate brokers. If you are looking to invest in properties directly, a broker can give you access to great off-market deals. The “brokers” in the passive investing ecosystem include sponsors, property managers, and CPAs. Don’t skimp on these vital team members.
You will see variances in syndication fees for acquisition, asset management, property management, and other fees. Of course, you have to assess these fees carefully, but don’t discount a syndicator simply because their acquisition fee is 2% vs. another’s 1%. You have to consider their experience and track record. Some operators who have been doing this for decades may have higher fees than those who only have three deals under their belt and none that have gone full cycle. The ones who have the great track record should be able to command higher fees and GP-friendly partnership splits. As long as you are happy with the investor pro forma returns, you should not dwell too much on their fees. Of course, you need to fully vet the sponsor, the deal, and the location before wiring over your money.
Property management is a key aspect of commercial real estate. An excellent property management group can save an asset that has unforeseen issues while an inexperienced team that does not run a tight ship can sink a deal that should have been a winner. If the sponsor is using third-party management, you should vet them as well.
Taxes are the biggest personal expense for most people. A CPA with lots of experience in real estate can save you tens of thousands of dollars or more. If you are searching for a new tax accountant, vet them like you would a syndicator. Let them give you examples of how they can save you money every year as a real estate investor. But don’t just depend on their expertise. Learn how the tax code can work in your favor so you can ask intelligent questions. Tax-Free Wealth by Tom Wheelwright is the best book I have read that talks about saving on taxes. The Wealthability Show and The Real Estate CPA are great podcasts for furthering your knowledge about taxes.
6. The power of getting something for nothing
“How fast do I get my money back?” Left Fielders are always asking this question because they understand the time-value of money. A dollar is worth more now than a dollar is in the future. If you get your capital back faster, you can re-invest it into something else while still making money in the first investment. Having consistent cash flow and/or a cash-out refinance of the loan are ways that syndications can put money back into your pocket before the asset is even sold. In contrast, buying a stock that does not give out dividends is a hope-and-pray strategy.
One other powerful way limited partners can get substantial amounts of their money back quickly is through the power of bonus depreciation. With this strategy, depreciation that is normally taken at five, seven, or fifteen years, may be accelerated to year one! Many Left Fielders have received 80%, 90% or even over 100% bonus depreciation on their K-1s from apartment syndications. If you invested $50,000 into a deal and received 80% depreciation from it this year, that could shelter $40,000 of passive income and give you back $14,000 in 2021 if you are in the 35% tax bracket. That is the equivalent of a 28% cash-on-cash return in the first year! Of course, since depreciation gives you a passive loss, this can only offset passive gains. Ask your CPA how this powerful tax strategy can work for you.
7. Teach and you shall receive: the power of giving
Although I have been with Left Field Investors since its inception, I have probably gained more from our network than I have given to it. When you find success from your vetting techniques or learn new information about sponsors or new markets, please share what you know. It’s great to see all the support and sharing of knowledge that is going on every day in the Infield Forum. However, it does not have to be limited to our group. Talk with your family and friends about the merits of passive investing. Spread the word in your local REIA groups. I guarantee that most of the attendees know very little about syndication investing. In fact, our group began as an offshoot of a local REIA. Being a giving person by teaching others can only make you a better investor.
8. Overcome fear, cynicism, laziness, bad habits, and arrogance
The author spends an entire chapter on these obstacles. Even the financially literate may have to face these roadblocks when changing their investing philosophy. Your family and friends may become your biggest naysayers because they may only be familiar with the traditional stocks, bonds, and mutual funds. As long as you educate yourself, you should have confidence to pursue passive investments. Get involved with Left Field Investors or, better yet, the Infield. We think outside of the box, and members of our community can be some of your best supporters.
9. Know your why
Even though this statement may sound cliché nowadays, this was the first book that I read that talked about your “why”. In the book, this section is actually titled “Find a reason greater than reality: the power of spirit”. Around 2008, my wife and I enrolled in a weekend Rich Dad seminar. This course introduced us to all the different aspects of active real estate investing – much of this material was new to me. During the last session of the last day, we all got up to tell the rest of the group “why” we wanted to take this journey into real estate investing. As you can imagine, many of us became emotional during our testimonials because we talked about our families and our individual situations. Having a “why” (or several “whys”) can be so powerful and be the driving force for you to investigate passive investing if you have not already.
What is your “why” for passive investing?
Rich Dad Poor Dad was a pioneering book that continues to shift readers’ attitudes toward money and investing. I know that many of you may have read it years ago. I encourage you to read it again because it may have a different impact on you especially if you view it through the Left Field Investor lens. More importantly, get involved with a community like ours. Six of the nine Rich Dad lessons that I wrote about deal either directly or indirectly with growing your network. Now is the time to get in the game!
Steve Suh is an ophthalmologist and is one of the founders of Left Field Investors. After owning a few small residential rentals and seeing that it was not easily scalable, he transitioned to the world of passive investing in commercial real estate syndications. He enjoys learning and talking about real estate and hopes to educate more people about the merits of passive investing. You can contact him at [email protected].
Nothing on this website should be considered financial advice. Investing involves risks which you assume. It is your duty to do your own due diligence. Read all documents and agreements before signing or investing in anything. It is your duty to consult with your own legal, financial and tax advisors regarding any investment.