You Have Been Investing Wrong, and Here is Why

Robert Kiyosaki, founder of Rich Dad company, in his book, The Cash Flow Quadrant, explained how most people typically make their income in at least one of four ways or a combination thereof – working for others (Employees); working for themselves (Self Employed); having others work for them (Business owner) and having money work for them (Investors). The income employees, self-employed and business owners earn is often referred to as active income, while the income earned from being an investor is referred to as passive income. I highly recommend doing everything in your power to convert your active income to passive income. By the time your passive income can replace your active income or at minimum, cover your living expenses, you would have achieved Financial Independence- this is the goal of investing and what you have been doing wrong! At this point, going to work becomes a choice rather than an obligation. There are different vehicles that people employ to become investors – crypto, stocks, bonds, insurance, precious metals, mutual funds, real estate, forex, etc. As you can see, there are several options to choose from. I personally prefer income-producing real estate. I’ll get into the details shortly, but first I’ll tell you why I decided to move my position from the stock market: back in 2015, Apple (AAPL) stocks dropped by about 10% because Apple sold about 2 million units of iPhone less in that quarter than they were projected to sell – they still eclipsed 50 million unit, but still that was not enough for the “analysts”. For all I know, the “analyst” could have been some kid who just graduated college, who got the guidance from his superior during a coffee break. The point is this – you have very little control when you are invested in the stock market!

There are at least six reasons why you should consider investing in income-producing real estate:

(AAPL) stocks dropped by about 10% because Apple sold about 2 million units of iPhone less in that quarter than they were projected to sell – they still eclipsed 50 million unit, but still that was not enough for the “analysts”. For all I know, the “analyst” could have been some kid who just graduated college, who got the guidance from his superior during a coffee break. The point is this – you have very little control when you are invested in the stock market!

There are at least six reasons why you should consider investing in income-producing real estate:

1. Leverage – you need about 20% to control 100% of the property. By fully controlling the asset, you reap 100% of the appreciation even though you only put that 20% of the equity.
2. Depreciation – You use depreciation to reduce your taxable income, thereby effectively reducing your tax liability.
3. Debt Pay down – The principal and interest are paid down from the rental income, and the best part of this is that the debt pay down is “outsourced” to the tenant.
4. Cash flow – This is the disposable cash that you earn after all your expenses are paid from the rent received. Expenses include (but not limited to) PITI, HOA, utilities, management fees, vacancy.
5. Debt Destruction – You’ve heard about the time value of money where money today is worth more than the same amount in the future. The same concept applies here – you have a loan in today’s dollar amortized over time. This debt is worth less with time, but you loan amount does not change!
6. Appreciation – While you have no control over equity appreciation, and generally do not recommend banking on this in your analysis, it can’t be ignored, particularly in cyclical markets like San Francisco and New York.

In subsequent write-ups, we’ll delve into more details on the six tenets listed above. But for now, know that income-producing real estate is a multi-dimensional asset class that not too many other asset classes can rival.  

Do you agree or disagree? Share your thoughts and comments below. You don’t have to be great to start, but you have to start to be great!