how the cash flow generated from property investments appreciates in value and
ensures financial freedom, as well as the freedom to be your own boss.
Discover real estate investing wisdom from the trenches with The ABCs of Real
Estate Investing. Learn how to evaluate candidates based on the qualities of a
good partnership, become familiar with various research tools, stay away from
shaky deals, and establish systems for maintenance, accounting, rent collection,
The Myths and the Magic
In every business and every industry there are people who just seem to drip
with success. They seem to know all the right people, make all the right
decisions, be in all the right places at exactly the right time. They seem
destined for success whether they even try or not. Real estate investing is no
different. In every city or town, there seem to be real estate tycoons that
struck it rich through real estate.
These are the people who just make success look easy. They appear confident,
knowledgeable, savvy, and seem to see opportunities where others don't. It's
easy for onlookers to think the achievements of these golden few are the result
of luck or some sort of magic. But magic and luck have absolutely nothing to do
with it. About fifteen years ago, I decided I was going to be one of the people
I just described. I was going to make my own success, be my own boss, and
achieve financial freedom. And I chose property management as my route. Call it
instinct, call it impatience, call it burning desire. I wasn't about to wait for
a lucky break or a magic charm. I set out to make my dream happen, and I did it
In the early days of my first property management and real estate deals,
there was a lot of trial and error and I made my share of mistakes. But for
every one mistake I made, I learned ten lessons and got smarter every day. I
started to see patterns, discover formulas and systems, and develop a network of
people I could count on. It took time and it took work, but the more I pursued
my dream, the luckier I felt and the more often magical opportunities presented
themselves to me.
Maybe there is a bit of luck and magic in success. But it's luck and magic
that comes from working hard and being prepared. At the Rich Dad Seminars, where
I often speak, I see people all the time who are taking the first steps toward
future success, much like I did nearly two decades ago. Many have what it takes:
the drive and desire that will help them overcome obstacles and be prepared.
Unfortunately, I also see at the seminars some who lack what it takes. They
are the ones looking to get rich quick and have little or no idea of the
commitment required to achieve business success. Others have a lot of desire,
but lack the technical skill and the knowledge that can only come from
experience. I wrote this book for them. This is not a get-rich-quick book. It is
not a book written to motivate, although I hope you'll be inspired to follow
your real estate investment dreams. Instead, it is a book that will disclose
proven methods, remove the unknowns, and shorten the learning curve for anyone
who chooses investment real estate as his or her path to financial freedom.
Before we get too deep into the how to's of finding, buying, and managing
investment property, let's take some time to drive out a few myths, myths that
if you buy into them, will only hold you back. I think you'll find the following
list familiar. Have you or others said these very things? Are any of these
statements echoing in your head and preventing you from moving forward? Are
these untruths paralyzing you with fear? Let's get rid of them right up front.
It's time to dump the baggage!
Myth #1: You Have to Already Be Wealthy to Invest in Real Estate
People think they need to have a large lump sum of money to invest in real
estate. They think it is like saving for their first home or that it's something
they can only do once they have made their fortune elsewhere. Both of these
thoughts couldn't be further from the truth. You don't need hundreds of
thousands of dollars in the bank to invest in real estate and you certainly
don't need millions. All you need is a good real estate deal that makes
sense-one that has profit potential and is based on solid financials.
My partner and I have been working this way for years. My very first
investment deal was a condo that I bought furnished and rented out. It was a
two-bedroom unit that I put into a rental program. People who wanted to get away
from it all could call up and rent my condo or one of a hundred others for a
weekend getaway. A cool $116,000 was what I paid and I put down $20,000 out of
my own pocket. You're probably thinking, "See, I knew you had to have some cash
to get started in this business."
Well, I did that deal before I knew better. Contrast that with a more recent
acquisition of a 182-unit apartment complex in Sun City, Arizona. The total cost
was $9 million. Before you close the book and say, this is out of my league, let
me finish the story. The down payment was $2 million, which we raised from other
investors. My out-of-pocket was zip. I gave the majority of the ownership to the
people who lent me the down payment; in essence, I formed a partnership with
them. My salesmanship had nothing to do with it. The deal was the hero; it was
so good that people wanted to be a part of it. What I've come to know is that
there are a lot of people looking for good real estate deals.
Some people are partner-averse, but I think partners are valuable. They help
you spread your risk by allowing you to own smaller positions in a number of
properties rather than a big position in just one. And it's a fact that teams
accomplish more. As for the return? Which deal would you rather do, the $116,000
property that cost you $20,000? Or the one that cost you nothing and yielded you
10 percent of a $9 million deal? For the record, that's $900,000 and I'd choose
the latter any day of the week.
Once you have located a real estate opportunity, the task is finding
investors who are looking to earn a good return on their money. The first deal
you do, granted, is the most difficult, because you are an unproven entity. But
trust me: It gets easier and easier with every successful deal you put together.
All things are difficult before they are easy.
Today, my partner and I have people literally standing in line who want to
invest in our next real estate venture. Not because we're anything special. But
because we are thorough. We look at a lot of deals and choose only the ones that
are financially viable like the one above. We also communicate with our
investors and treat them fairly. They make money when we make money.
You may be surprised to learn that there are plenty of people interested in
investing in real estate, particularly when other investment vehicles like the
stock market and bonds are flat or declining. Just look around at a Rich Dad
Seminar. There are thousands of people in every city in which we speak who are
looking for real estate investment deals that make sense. One of the people in a
Rich Dad Seminar could be your first investment partner.
Myth #2: You Need to Start Small-Big Deals Are Too Risky
There is nothing wrong with starting small. Perhaps you're thinking about
buying a $250,000 single-family home and making it a rental property. Or even a
$320,000 duplex. But why rule out a $2 million, fifty-unit building? Believe it
or not, any of these properties are within your reach.
Of course right now you're thinking, "No way! I can't afford a $2 million
mortgage!" And to that I say, you may be right, but you don't have to be able to
afford it. Here's why. Mortgages on smaller properties like single-family homes
are almost always guaranteed through the buyer's own personal earning potential
and wealth. You may be surprised to learn that larger investment property loans
are secured by the asset itself. In other words, instead of the $2 million
building riding on your own wealth, it is riding on its own valuation. This
already is less risk to you.
Let's look at the previous example. The condo I purchased for $116,000 with a
$20,000 out-of-pocket down payment was 100 percent my responsibility from
mortgage to management. The $9 million project that I owned 10 percent of for no
out-of-pocket cost was actually less risky because I had no cash invested and
the property was professionally managed. The other property was mine, all
mine-for better and for worse. Five years later, I sold the condo for $121,000,
a gain of $5,000. Recently we refinanced the 182-unit building, which we had
owned less than a year. Its newly appraised value was $11.3 million, more than
$2 million above what we paid for it. And since I own 10 percent of the project,
I made over $200,000 in less than a year. A testament to the power of buying and
managing right and managing well.
This example also demonstrates risk related to valuation. When you buy a
house or condo and rent it out, appreciation of the property rests solely on the
appreciation of the surrounding neighborhood. You better have bought in the
right neighborhood, because there is little you can do to increase the value of
your property. By contrast, appreciation in commercial property, like apartment
buildings, is based on the cash flow of the property itself. The more money it
makes, the more money it is worth. Now you're in control! When cash flow
increases so does the value of the property. Manage your property right and
you'll increase the value. Don't manage it right, and the value will stay the
same or go down.
Another way larger properties are less risky relates to occupancy. When a
single-family home is rented, it's 100 percent occupied. When it is empty, it is
100 percent vacant, and you are covering the mortgage out of your own pocket in
its entirety. In a larger property, even an eight-unit building, if one resident
leaves, you still have seven residents paying rent. Your exposure related to
occupancy is greatly reduced the more residents you have.
Myth #3: You Can "Flip" Your Way to Success or Get Rich Quick with No
Many people think that flipping property, in other words buying it and
quickly turning around and selling it for more than you paid for it, is the way
to grow wealth. The people who believe strongly in this have been lucky enough
to make money this way. But in my opinion, this is like day trading in the stock
market. It isn't easy, and it is very risky.
No money down is another way of saying that the property is 100 percent
financed. That means a much larger part, if not all, of your cash flow is going
toward the monthly payment. In no-money-down deals, you'll be paying higher
interest rates because there is greater risk to the lender, have higher loan
costs, and have virtually no money to improve the property or even repair it
should something break. With this model, you are banking on the property
appreciating to make money rather than improving the operations of the property
and making money through cash flow. Let's hope the market is high-flying and
that you time it perfectly because you'll be banking on external factors being
just right. Appreciation, as you'll see in great detail later, is only in your
control when you've improved cash flow. In this scenario you have none!
As you might have guessed, I don't believe in zero dollars down, and I don't
believe in flipping property. Even in the example where I personally put no cash
down on the $9 million apartment building in Sun City, we as an investment team
put $2 million down. I believe that buying and holding income-generating assets
like rental properties is how you build wealth. You may say, "But I need the
capital gain-the additional equity I've made on this property-to buy a second
bigger rental property with more units. That means I have to sell the first
one." In my experience this just isn't true. What you need is a second
investment deal that makes sense that you can bring to investors. They will help
you raise the down payment on the second property and you will reward them as
the investment makes money.
We recently finished construction of a 208-unit property located in Goodyear,
Arizona, which cost us $13.8 million to build. Upon completion it appraised for
$16.3 million. We have received numerous offers to sell this property and
brokers were standing in line for the listing. As tempting as it was to walk
away after two years' work with $2.5 million in cash, we did not sell it. The
problem is one of taxation. Had we taken the $2.5 million gain, we would have
been forced to place that money back in the market to avoid a pretty hefty tax
bill. Sure we had appreciation, but we also had what is known as a "taxable
event." Imagine the tax bill of 30 percent on a $2.5 million gain. That's an
unnecessary $750,000 tax payment.
If you want the money out, you don't need to sell. You refinance the property
and pull out what equity you can. There is no taxable event, and you are not
forced to put the money into another investment. In the case of the 208-unit
property, we will refinance and we will use the equity that we pulled out of the
property to pay back our investors with interest. It's a great system and best
of all you still own the property, you continue to receive cash flow from the
building in the form of rent, and as the building appreciates, you can refinance
and take the gain-tax-free-again. That's the money that you can use for other
deals and it's what I do every day.
Property 95 percent of the time is going to become more valuable, not less
valuable as the years pass. Especially if you follow the methods in this book
that teach you to buy property right so you can afford the necessary
improvements that will revitalize the neighborhood and make it a better home for
residents. All that adds value and it makes sense to ride the wave of
appreciation long term.
Myth #4: Some People Just Have the Midas Touch
It is easy to think that people who are successful investing in real estate
have some sort of Midas Touch. But there is no such thing. They are just people
who see opportunities and know how to make them real and profitable.
Take any ten-acre piece of land. Let's say this parcel is flanked by
significant retail presence on all sides and most of the big retail chains are
represented in adjacent centers. There's also a large microchip manufacturer
nearby that employs 1,000 people.
Ask a tract home builder and he'll see forty single-family homes on that ten
acres. Ask a custom builder, and he'll see ten luxury estates. Ask a retail
commercial developer and she'll see a new shopping center anchored by two large
retailers, with specialty stores and restaurants as fill-in. Ask a multifamily
developer and she'll see a 150-unit apartment community with clubhouse, pool,
and work-out facility. Another commercial developer who specializes in office
space may see a three-story office building. In other words, everyone sees the
property differently, and each vision will deliver a different level of
payout-some better than others.
The important part of recognizing opportunities is common sense. People who
seem to have the Midas Touch use their common sense when looking at property and
opportunities. In the example here, common sense tells me that building custom
homes would be a tough sell on a ten-acre parcel flanked by heavily trafficked
retail. Single-family tract homes may be just as challenging. Additional retail
may be viable if the developer can lure high-quality anchor tenants to the
location. But they may already be operating in other nearby centers. By far in
this example, either multi-unit housing or office space are the most viable
options. Why? Because of the nearby employment base, the absence of apartments
in the area, the proximity to retail, and the lack of office rentals. The
developer in this instance who builds offices or apartments will have the best
chance of success and will appear to have the Midas Touch. There's no magic,
just common sense.
How do you know you're relying on your common sense? It's easy. If everyone
you talk with is having difficulty seeing your vision for a property it can be
either one of two things: A revolutionary idea that will prove everyone wrong.
Or a bad idea that everyone recognizes as a bad idea, except you. In 99 percent
of the cases, the latter proves to be true. Remember, if you have to hard-sell
your vision for a property to everyone you share it with, it is likely your
project when completed will be a hard sell, too! And that will cost you money.
Myth #5: You Need a Great Deal of Confidence
Not true. People underestimate themselves all the time. They listen to that
little voice of self-doubt that whispers and sometimes shouts in their brain
telling them all the reasons why they can't do something, why they shouldn't
even try. I believe there are two voices: the voice of reason, and the voice of
self-doubt. The voice of reason is common sense; the voice of self-doubt is your
past leading your future.
I made a conscious decision not to let my past dictate my future. I grew up
in an average middle-class home. There's nothing wrong with that. In fact, in my
estimation, there's everything right with that. I worked for what I got. I
learned solid values. A good deal of that came from my parents. My father was
not particularly entrepreneurial until later in his career. Hardworking, yes,
but not entrepreneurial. He worked for the same company for most of his career
and earned a stable living that supported our middle-class lifestyle. It was a
good life for me, my brother, and two sisters.
When I got out of college I followed in my dad's footsteps and got a job. But
while in that job, I began to meet people-people who showed me their
entrepreneurial ways. They became my mentors, and from them I became
entrepreneurial. Then I combined the innate values I received from my parents
and my own newfound entrepreneurial spirit and I became whole.
Nothing in my upbringing would have prepared me for what I'm doing now. And
yet everything did. I believe it is up to each of us to let go of the memories
and the scars of unsupportive fathers, ultra-critical mothers, ridiculing
friends, and teachers who labeled us from the first day of school. Everybody has
had negative influences in their lives and every one of us will have lots more.
Look at Hollywood. What's a celebrity profile on E! without the struggles,
without the strife? Everyone must rise from challenging situations-that's what
successful people do. They decide to get beyond their past, whatever it may be.
I've chosen to accept my past, learn from it, copy what was good, and realize
the bad stuff only makes me stronger.
Real estate investing is a business where you will need to draw on your
strength. My advice is not only to look for strength in all that is good in your
life, but also to use the hard times for what they are: character-building
experiences. And contrary to what most people think, we can never have enough
character. That's my soapbox on confidence and character. The rest of this book
is dedicated to building your property investment business.
Myth #6: You Want to Do It but Don't Really Have the Time
This really comes down to choices and priorities. There is always time to do
the things we need to do like go to work every day, mow the lawn, feed the dog.
Often there isn't time to do the things we really want to do. Learn to speak a
second language, build a bookcase, or volunteer in the community. There is a
difference between need and want. We'll often do what we need and put off what
we want. Unfortunately our wants are what truly enrich our lives.
The investment real estate business is something you should want to do and
may even need to do. It's work. To be truly successful, especially in the
beginning, you will be involved in the day-to-day activities of finding and
evaluating property, negotiating deals, overseeing contract repair work,
possibly even managing the property once it's yours. I can honestly say, I find
the business rewarding, fun, and because of that, it is profitable.
I fell victim to the myth of not having enough time myself, and I take full
blame. Sharon Lechter and Robert Kiyosaki asked me to write this book two years
ago. Finally I embraced the idea and actually started wanting to get it done.
But wanting was not enough. What got me going was a do-it-or-else deadline. That
got my attention and made me realize I needed to get disciplined and write the
book. That's what got the book done.
If you don't have the time to begin your real estate investment business,
maybe in your mind, you don't really need to do it. Maybe you simply want to do
it, and "want" alone may not be enough to get you started. After all, if you
work during the week at another job, you will have to search for and evaluate
property on the weekends. You'll need to make phone calls when you can during
the week or in the evenings. There's always a way to make your dreams come true
. . . as long as they are truly your dreams.
Myth #7: You Have to Know Somebody to Get Going in This Business
While knowing a few key people such as a real estate agent, an attorney, or a
banker may save you some time, you don't need to know anyone even remotely
connected with investment real estate to get started. In this book, you'll
discover the key people you need to have on your team. And you'll find that the
goals you set for yourself will actually define the team. People you know today
may or may not be the ideal people for your team once you determine what you
want to gain from your real estate investment business.
Just get started and you'll be surprised how many people you'll get to know
and how much they will teach you. You'll have "friends in the business" before
you know it. Here's what I mean. We're doing a deal in Portland, Oregon. I live
and work in Arizona. I hadn't been to Portland in over ten years. Anyone I had
once known there was long since gone. Neither I nor anyone else in my company
knew a soul in Portland. What we did know was that the city was situated on two
rivers and that unemployment was high. The latter meant that the people who
owned property were probably not doing so well. And to me that spelled buying
opportunity. We had one big problem: We knew about the city, but we didn't know
a single person in the city. We figured the market conditions were at least
worth a plane trip and a few days in Portland.
Before our trip, we made our minds up to find our team, at least the start of
it. So we went on the Internet and looked up property managers, city officials,
brokers, and so on in preparation for our trip. We were not about to travel that
far and not meet with anyone who could educate us about the market. As a result,
we had ten or twelve meetings over a period of two days. It cost us a few
lunches and dinners, but we had the beginnings of our team.
Myth #8: You Have to Be a Seasoned Negotiator and Businessperson
Again, this is just not true. Experience in business may make that first walk
into an investor's office more comfortable, but that's all it will do. Your true
power and confidence won't come from your past experience. Instead, it will come
from the solid deal you assemble that is a win-win for everyone involved. This
book will show you how to find and evaluate property with the ultimate goal of
establishing a realistic purchase price that maximizes your monthly income and
appreciates the asset. Find a deal like that and everyone will want a piece of
Over the years, I've walked away from a lot of deals, and negotiation had
nothing to do with it. One of those deals was a 205-unit building in Glendale,
Arizona. About a year ago the listing price was $7.9 million, and the broker
told me there were other offers-the highest one being $7.2 million. We did our
homework on the property and by my estimation, $7.2 million was fair based on
the operations of the property. The seller declined every offer and pulled the
listing. Six months later, the seller relisted the building for $8.1 million. If
I had still been interested in the property I would have made an offer based on
operations. It would have been the same $7.2 million offer I made before. The
seller would probably kick me out, along with everyone else who made him an
offer based on operations. Are you surprised to learn that he still owns the
With the method in this book, you'll find out that the listing price is
meaningless. There is no point negotiating based on this number, and actually
doing so is a recipe for disaster. That's because in most cases, the listing
price is the seller's opinion of what the property is worth. It is not founded
on the actual operations of the property. What most people consider negotiation
meetings are for me more accurately described as presentation meetings. That's
when I present the numbers, and they are pretty much take-it-or-leave- it deals.
When I get kicked out, and in truth, usually it is a mutual parting of the ways,
it's because the numbers don't work. Walking away is a good thing.
Myth #9: You Have to Know a Lot About Real Estate
This myth holds people back every single day. They feel they have to already
be experts in a field in order to be successful, whether it is real estate or
stock investing or dry cleaning! First of all, success is a journey, it's not a
destination, and all successful people start at the same place. One day they
wake up, they throw their legs over the side of the bed, they yawn-and they
Only by beginning and by continuing day after day do we ever become experts.
We gain expertise through experience. By reading this book, you'll get a solid
framework from which to begin. And you'll gain enough knowledge to sound really
smart at cocktail parties and backyard barbecues, but more importantly you'll
learn tons more from your first deal. And more still from your second and third.
And even more from your fourth.
I learn something new with every venture. Some of the buildings we recently
bought in Portland were built on an old wooden pier constructed in the 1930s.
Who would have guessed when I embarked in this business that I would have to
learn everything about the structural integrity of seventy-year-old piers? Not
me, but we needed to find out everything about the condition of that pier before
we went forward and purchased the property. I live in the desert. So you can
imagine how foreign it was for me to hire divers and a boat and structural
engineers to do the inspections. It was a real learning experience. I'm always
encountering something new. That's part of what keeps it all interesting.
The only way you'll know a lot about real estate is to begin in real estate.
Once you do that, you'll meet people, learn your market, see the patterns, and
understand the trends. You'll encounter your own seventy-year-old wooden piers,
but that will keep it fun. And before you know it, you'll be wowing people at
cocktail parties and barbecues with experiences you've lived rather than just
Myth #10 You Can't Be Afraid of Failing
Show me an entrepreneur who says he or she isn't afraid of failing and I'll
show you a liar! A bold statement, absolutely, but a true one. Everyone is
afraid of failing. The difference is that some of us let that fear of failure
hold us back. Sometimes fear stops us from beginning altogether and that's
unfortunate. If that's the case, make the decision now to just begin putting one
foot in front of the other, making one phone call at a time, visiting one
property, and then another. It's not hard, but it can seem so if we focus on the
end result instead of the tiny-and very doable-steps in between.
Sometimes fear of failure occurs when it comes time to "pull the trigger" on
a property. I call it analysis paralysis and people fall into it all the time.
They overanalyze an opportunity and are never quite able to sign on the dotted
line. This book will prove especially helpful to people with this sort of fear
because it will show you exactly what you need to know to analyze an investment
property. When the numbers add up, no further analysis is necessary. Frozen in
fear will be a thing of the past.
Another way fear of failure presents itself is through regret. In other
words, we've pulled the trigger, but then when difficulties occur-and they will
occur, they always do-we regret the decision and waste energy by asking "Why did
we do this?" instead of "What can we do to get past the hurdle?" This form of
fear can turn an otherwise great opportunity into a bad investment. In my life,
I don't regret decisions. I just consider the place where I'm at as the starting
line and go for the gold every day.
I admit when I was just starting out I had an acute fear of failing. The
difference is I knew that if I did nothing and remained frozen in fear, I would
fail. I felt I had a better chance of success by just going forward one step at
a time to make some opportunities pay off. That's the thing about fear of
failure, if you don't use it to your advantage as a motivator, it becomes a
Myth #11: You Have to Know the Tricks of the Trade
There are no tricks of the trade in the purest sense of the term. But there
are secrets to success in life. And as long as you know those, you'll be
successful at anything. First, you have to set goals. Goals will be the
foundation of the roadmap for your success. They will also tell you when you
have arrived, so you can pat yourself on the back. Everyone needs that
reinforcement. Not coincidentally the next chapter is all about goal setting.
Second, you have to persevere. Quitting when things get tough doesn't produce
winners. In fifteen years, I could have quit a hundred times. I've had plenty of
tough problems. Financing that falls through, employee problems, and downright
frightening resident issues. But successful people work through difficulties and
they come out on the other side stronger, more confident, and better prepared
for the next challenge. And trust me, there will be more challenges. Finally,
you have to understand the process. That's what this book will do. It will take
you from beginning to end and every step in between. From setting goals to
setting up your team, to finding property, to evaluating it, to determining a
purchase price, to managing it, I'll let you in on fifteen years' worth of
experience. I hope this book will become your handbook for success.
CHAPTER 1 ACTION STEPS
• Understand the myths in this chapter.
• Ask yourself if there are any others.
• Identify the ones you believe to be true.
• Determine which myths have been responsible for hindering your success.
• Make the commitment to abandon these unproductive myths.
• Make the commitment to learn techniques and preparedness so magical things
Copyright © 2004 by Ken McElroy.