Rich Dad Education Blog

By Kim Kiyosaki

Before you turn over your down payment on an investment property or write a check for $2,000 worth of stocks, it's a good idea to know just what exactly you are investing for. It surprises me how many people who have already purchased investments do not understand this one basic concept of investing – what are you investing for. By just learning this one fundamental concept you'll be ahead of the game.

Before you turn over your down payment on an investment property or write a check for $2,000 worth of stocks, it's a good idea to know just what exactly you are investing for. It surprises me how many people who have already purchased investments do not understand this one basic concept of investing – what are you investing for. By just learning this one fundamental concept you'll be ahead of the game.

TWO THINGS COUNT

With any investment there are generally two things you invest for: capital gains or cash flow.

CAPITAL GAINS is your profit you make on the sale of an investment. For example, you buy a house for $100,000. You put a little money into fixing up the property. You then sell the property for $150,000. Your profit on that sale is called capital gains. The same applies to stocks. You purchase shares of a stock at $25.00 per share. The stock price goes to $35.00 per share. Your profit when you sell is your capital gains. A capital gain is only realized when you actually sell the investment. Of course, when you sell the investment and instead of making money you lose money then you have a capital loss.

CASH FLOW is money that comes in on a regular basis (monthly, quarterly, annually) from an investment that you hold onto and don't sell. Let's go back to that $100,000 house. Instead of fixing it up and selling it, you fix it up and rent it out for $1,000 per month. Each month you collect your rent, pay the expenses such as repairs, taxes and insurance, pay the monthly mortgage payment and if you've managed the property well at the end of each month you will have a profit or positive cash flow that flows to your pocket. Some stocks deliver cash flow in the form of dividends. Or maybe you've invested in a friend's start-up company and she agrees to pay you 12% per year on the money you invested with her. This is also cash flow.

A simple way to remember the two is that a gain is a one-time event – a sale. Cash flow is continual or flowing.

WHICH STRATEGY IS BEST?

Why is knowing the difference important? It depends on what your investment goals and interests are. One strategy is not better than the other, just different.

In 1989 when I bought my first rental property, my husband, Robert, and I had a goal. That goal was to be financially free. Our definition of financial freedom was simple: more money coming in every month from our investments (primarily real estate) than was going out each month in the way of living expenses. Not rocket science. Yet by defining that goal our focus went immediately to cash flow. In order to have that money flow in every month our plan was to buy, hold and rent out our properties. We accomplished our goal of financial freedom in 1994, five years later. We were not rich. We had $10,000 coming in each month from our apartment buildings and a few single-family homes. The beauty of this formula was that our living expenses were only $3,000 per month. At that point we were free. We no longer had to work for money because our money was working for us. That to me is the beauty of cash flow. It's not about the amount of money you accumulate, it's about the freedom it brings you. As you can tell cash flow is something near and dear to my heart.

That certainly doesn't mean that investing for capital gains is not the way to go. It's just not my primary strategy. Ideally I look for investments that have cash flow and future capital gains, also known as appreciation. I want every investment I buy to appreciate over time. The difference is I don't invest with just one option – to hope and pray that the property appreciates quickly so I can sell it and make a profit.

Finding The Rich Woman In You is about women attaining financial independence. You decide how best to do that for you. If stock trading is your thing, then go for it, full tilt. If you've become the expert and enjoy buying and selling properties then have at it. Just be clear on what your financial goal is.

A DIFFERENCE TO CONSIDER

The main difference for me between the two strategies is if I only focus on buying and selling investments, which is the capital gains approach to investing, then I have to keep doing it again and again to amass millions of dollars to live off of, if my goal is to be financially free and independent. I don't have the monthly flow of money coming in each month on a steady basis. Once I sell an investment then in order to amass more money I have to buy and sell another investment. To me it's a much longer and time-consuming process.

A MONEY RULE FOR LIFE

Which brings up an important rule that I live by. Any dollar that goes into my investment or asset column, STAYS in my investment/asset column. In other words let's say I put up $100,000 as a down payment on a $1,000,000 property. Each month that property gives me a cash flow of $1,000 or 10%. I can use that cash flow from my property however I want, but if I sell that property the original $100,000 goes into another investment. I don't spend it because I want my investment portfolio to keep growing. Once a dollar bill goes into my investment/asset column it never, ever, ever, ever leaves that column. If I buy 100 ounces of silver which today would cost me about US$1,500 and later I sell that silver, I then move the original $1,500 into a new investment. My profit or capital gain is mine to do what I want with.

What I see happen repeatedly is that a person buys the $1,500 worth of silver. Then an unexpected expense pops up, such as needing to buy new tires for her car. What does she do? She cashes in her silver, buys the new tires and now she is back at square one and has no investments. Again, once you've committed a dollar for an investment, that dollar never goes towards anything else but investments. If that investment is the first place you turn to when a financial emergency arises then your investment portfolio will never grow and you'll find yourself back at the beginning time and time again.

IS IT ONE OR THE OTHER?

Do I ever invest for capital gains? Absolutely I do. It's still not my primary focus but I do have capital gain investments. In future articles I'll go into how I used both capital gains and cash flow in one real estate deal to accomplish my goal. I'll also discuss some other properties I've purchased and why specifically I bought them. Please stay tuned.

Here's to your financial independence!

Investor, entrepreneur and author of "Rich Woman," Kim Kiyosaki educates women about money and investing through books, speaking engagements, a PBS TV show and RichWoman.com. Kim and her husband Robert created the CASHFLOW® board games and own The Rich Dad Company.

©2007 The Rich Dad Company, used with permission

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Savvy landlords set and enforce clear rules for their tenants, but tenant rules and policies are not a “one size fits all” proposition. What do you need to consider when establishing rules and regulations for your tenants?

By Jacquelyn Lynn

Whether you own one rental property or hundreds, whether they are single-family homes or multi-unit buildings, your rental agreement should include a clear list of the rules and regulations by which you expect your tenants to abide, as well as the consequences for failure to do so. The rules need to be reasonable, appropriate for the property (for example, you don't need rules for pools or playgrounds if you don't have them), and specific enough to protect your interests.

Whether you own one rental property or hundreds, whether they are single-family homes or multi-unit buildings, your rental agreement should include a clear list of the rules and regulations by which you expect your tenants to abide, as well as the consequences for failure to do so. The rules need to be reasonable, appropriate for the property (for example, you don't need rules for pools or playgrounds if you don't have them), and specific enough to protect your interests.

Here are the general areas your rules and regulations should cover and some suggested policies:

• Maintenance. Tenants are responsible for letting you know on a timely basis when they have a maintenance need. Encourage common sense. A drippy faucet can wait until normal business hours, but a pipe bursting in the middle of the night requires immediate action. Typically, apartment dwellers do not perform any of their own maintenance; however, it's not uncommon for single-family home renters to handle small maintenance items themselves. Be specific about what you expect from your tenants in this area, including what expenses you will reimburse.

• Lawn care. If you have a multi-unit building, the landlord typically takes care of landscaping. But for single-family homes and some townhouse units, tenants may be responsible for lawn care. Your tenants need to know what is required of them in this area.

• Vehicles. For multi-unit buildings, you need parking policies. You may want to designate specific spaces for each tenant and spaces for visitors. A good rule of thumb is to allot one reserved space per bedroom. Stipulate what types of vehicles are allowed (typically cars, light trucks, and motorcycles) and what types are not allowed (such as motor homes, heavy-duty trucks, other commercial vehicles, or any unregistered vehicle such as scooters or ATVs).

Restrict what sort of maintenance can be performed on vehicles while they are parked on your premises. For example, you may allow interior cleaning; adding of fluids such as oil, antifreeze, and windshield washer fluid; tire changing; and replacement of small parts such as light bulbs and fuses. You may restrict exterior washing to a designated area or not allow it at all. Prohibit maintenance that could result in environmental or property damage, such as oil changes.

For single-family properties, you may want to limit the number of cars that can be regularly parked overnight, and restrict parking to concrete surfaces only, thus protecting the lawn. If the property is in a city or municipality, your rules should indicate that the tenant must comply with any local laws regarding parking.

• Pets. Clearly state whether or not you will allow pets, and if so, the kinds that are acceptable. In addition to dogs and cats, remember to address small caged animals (hamsters, gerbils, other rodents, reptiles, and birds), fish, and non-traditional pets and livestock. Set policies for noise, cleaning up pet waste, and flea and tick control.

• Guests. State that tenants are responsible for the conduct of their guests, and if any guest violates your rules, the tenant will be held responsible and the guest may be banned from the property.

• Overnight visitors. To prevent having unauthorized residents permanently move in with your screened tenants, establish a policy that anyone staying overnight in the unit for more than a designated time (perhaps a maximum of one week) must be added to the lease, subject to your standard screening process.

• Common areas. Set rules for use of common areas, such as recreational facilities, laundry rooms, parking lots, storage units, and service areas. Your rules should include hours of accessibility, permitted and prohibited activities, and clean-up requirements. Consider whether you will allow common areas to be used for private functions that would prevent other residents from using the facility at that time. For example, will you allow a playground to be reserved exclusively for a child's party, or will you require that during the party other residents still be allowed to use the playground?

• Locks and keys. Do not permit the installation of additional locks on residential units. Do not allow tenants to duplicate keys. To safeguard against tenants duplicating keys use key blanks marked "do not duplicate." Tenants should come to you for additional keys. Charging a fee to cover the cost of lost keys is reasonable.

• General conduct. Ban any threatening or criminal activity, public intoxication, and any other conduct that would put other tenants or the property at risk. Set reasonable restrictions on noise, such as forbidding noise above a normal conversational level after 9:00 PM and before 8:00 AM.

• Fire safety. Prohibit tampering with smoke detectors, and do not allow tenants to use non-electric space heaters or any device that requires an open flame, other than a gas stove you have installed or candles in safe holders. Tenants should not use cooking stoves as room heaters.

• Trash collection. Be clear on when and how household refuse is to be disposed of and whether or not you will offer recycling collection. If you have a dumpster, the company that provides it will set policies for its use. If tenants are responsible for getting their trash to the curb, be clear on when and how this must be done. Some cities require the use of specific containers, such as particular types of cans or bags.

In addition to setting rules, you should also establish penalties for violating those rules, such as fees, fines, and possibly eviction. Be reasonable—an after-hours use of the laundry room by an otherwise exemplary tenant would merit a simple reminder of the policy, but criminal activity could result in immediate eviction.

After you develop an appropriate set of rules, have them reviewed by a real estate attorney. Provide all prospective tenants with a copy of the rules with your rental application. Have them initial each page of the rules and sign an acknowledgement that they have received and read the rules and agree to abide by them.

Clear, reasonable rules that are consistently and uniformly enforced will increase the appeal of your properties, reduce your tenant turnover, and make your life as a landlord much easier.

Jacquelyn Lynn (www.jacquelynlynn.com) is a business writer, speaker, and author of "The Entrepreneur's Almanac".

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“The size of your success is measured by the strength of your desire; the size of your dream; and how you handle disappointment along the way.” -- Robert Kiyosaki

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Tips for cultivating strong relationships with your bankers

If you feel somewhat intimidated by bankers, you’re not alone. Plenty of people share your feelings. After all, bankers have the power to say “yes” or “no” to your loan requests, and that’s quite a bit of power for someone to have over your business.

Tips for cultivating strong relationships with your bankers

By Jordan Taylor

If you feel somewhat intimidated by bankers, you’re not alone. Plenty of people share your feelings. After all, bankers have the power to say “yes” or “no” to your loan requests, and that’s quite a bit of power for someone to have over your business.

Keep in mind that banks are not just benevolent entities that lend you money just because you asked for it. They are businesses, and their product is money. Just like you, they’re in business to make a profit on their product, and they do that by lending their product (money) to individuals and businesses, and charging interest, points, origination fees, closing costs, and other service fees. Banks want to make loans, but they have to make good loans, meaning loans that will be paid back on schedule.

By borrowing money from a bank, you are a customer on whose loan the bank is making money. You should act and be treated accordingly. Think about this: When you go into a restaurant and order a steak, does it even occur to you that the server or the cook might not “approve” of your order and therefore might not allow you to have it? Of course it doesn’t. And though that might not be a completely fair, apples-to-apples comparison, it’s not as different as it appears to be on the surface.

Just as there is good and bad in any industry, there are good and bad banks, and good and bad bankers. Most bankers are like most other people: They go to work every day and do their job as best they can without ever standing out. Many bankers don’t even have a lot of business experience. They come out of college and go into bank training programs, and their knowledge of business and investing comes more from textbooks than from practical experience. Learning banking is like learning anything else; if a banker can learn it and be trusted to make loans, why can’t you learn whatever it is that your banker knows?

Outside the bank

Getting to know bankers personally can take a lot of the mystique out of what they do. You can meet bankers by asking friends and business associates for introductions and referrals, as well as by getting involved in your community. Banks encourage their senior staff people to be involved in chambers of commerce and other civic organizations. Join those same groups and begin building your banking relationships. As you meet bankers in social and service situations, you will have many great opportunities to show them what you know by talking about business and investing in a knowledgeable way, but don’t, of course, bring up the fact that you’re looking for a loan when you’re at a networking cocktail party or a kids’ sporting event.

Remember that cultivating these relationships is a long-term investment of time and effort. Introductions made now might not pay off until far into the future. The junior loan officer you meet today might become president of the bank in 10 years, so nurture that relationship.

Inside the bank

When you go into a bank to meet with loan officers, you should approach them with confidence. They are peers, not superiors. They are not doing you a favor by lending you money; you are doing them a favor by borrowing from their banks.

With that said, you still need to be courteous and respectful. Make appointments for meetings and be on time; don’t just drop in and expect the bank officer to be available to see you. Appointments demonstrate that you value both the banker’s time and your own. Dress appropriately and remember that appearance does count. You don’t need to have on the latest designer fashions, but you should wear whatever is considered to be appropriate business attire in your community.

Interview bankers until you find someone with whom you are compatible and feel comfortable. Find the someone who believes in you and what you’re doing, and who will go to bat for you. Also make sure that you’re dealing with bankers who have real authority. Find out what their lending limits are, and if they don’t have the authority to make the kind of loans you need, find out who does.

Give bankers all the ammunition they need to work with you. Put together complete, attractive loan packages. Anticipate any questions the banker may have about the deal, and include the answers with appropriate documentation in the package.

Finally, when it comes to banking, the old saying of “don’t put all your eggs in one basket” has never been truer. Don’t deal with just one bank; establish relationships with several banks by dividing your deposits and loans among different institutions. This way, when one bank can’t provide what you need for any reason, you’ll have a backup lending source that you can access immediately.

Jordan Taylor is a regular contributor to Wealth Intelligence Magazine.

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Rich Guide Answers

Question: How can I find out if there is a real estate investing club in my area?

Answer: This is a great question because networking is one of the keys to successful investing. Investors aren’t the only ones attending the Real Estate Investing Association (REIA) meetings. You will also find professionals in real estate related fields such as mortgage brokers, insurance brokers, appraisers, real estate attorneys, and contractors attending the meetings.

There are a couple of ways to locate a local REIA. You could simply type “real estate investing club” plus your city name or state in an internet search engine, or you could go to creonline.com and find a list there under “Resources.” Your local club may charge a small amount for yearly dues to help cover the costs associated with holding the meetings, such as room rent and mailings.

Once at the meeting, exchange business cards with everyone there. This is a great way to get some leads for building a Power Team.

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