What makes a good investment?
In his chapter from The Cashflow Quadrant™, “You Cannot See Money With your Eyes”, Robert Kiyosaki writes about what makes a good investment. He commences by using an example of one of his first investment properties and how his deal was criticized by his Rich Dad. Robert had invested in a condominium and was going to lose money each month. Rich Dad asked him “why in the world would you knowingly invest in something that loses money?”
I hear Robert’s voice in my ears as I read these words. He stressed time and time again in his workshops that the numbers must make sense and intentionally losing money does not. I first heard Robert say this in the days of high marginal taxation rates in Australia. Many people were paying almost 50 cents in he dollar and would “negatively gear” in order to reduce their taxation. The tax rates have since been reduced but the thinking prevails and many people knowingly invest to lose money!
I must confess when I first heard Robert say you should never negatively gear, my tax accountant’s brain kicked in and I questioned him. I was trained to help my clients reduce their tax bill. I remember finally “getting it” with the realization that I would never advise someone to invest in a business to lose money – so why would they invest to lose.
The title of his chapter “You Cannot See Money With your Eyes” basically means you should not get taken in by the way a property looks, but instead, by the way the deal stacks up. The things that make a good deal include the financial agreement, the market, the management, the risk factors, the cash flow and other factors that make something a good investment. Losing money does not feature!
A friend of mine who is a very successful property investor has purchased many of his investment properties without physically seeing them but doing his due diligence on the numbers and other factors.
Assets and Liabilities
In this chapter Robert also discusses his definition of an Asset and Liability from his book Rich Dad Poor Dad which is:
“An asset puts money into my pocket.
A liability takes money out of my pocket.”
He points out that your mortgage is your liability and the bank’s asset. And he says that even if you pay off your mortgage on the house you live in it is still a liability – as it does not put money into your pocket and there are still ongoing maintenance costs. When I first met Robert I argued with him on that point (accountant training) but now I “get it”.
Money is an Idea
Robert finishes his chapter saying “money is an idea” and he quotes a line from Kenny Roger’s song the Gambler “If you’re going to play the game, boy, you’ve got to learn to play it right”. This sums up the chapter beautifully. I have heard Robert play the song many times to get his point across.