Tax season always means a deluge of tax advice. Unfortunately, most of it is futile and lightweight.

I say that because most people work for their money rather than have their money work for them. The problem with working for your money is that you pay more in taxes as your income goes up. In fact, if your income passes $65,000 as a W-2 employee, you may find yourself being double-taxed with the Alternative Minimum Tax, or AMT.

Working hard to earn more money and then giving it away in higher taxes isn’t financially intelligent, even if you do put some of it into a retirement account. On the other hand, making your money work hard for you means your earnings are taxed less, if at all.

Better Financial Advice

Recently, on a popular morning TV show, a personal finance expert recommended putting half of your tax return into your IRA, which she claimed may yield (for the average person) a whopping $25,000 gain over 40 years.

The problem with this advice is the likely decline in the purchasing power of the dollar — inflation — over that 40 years. I estimate that in 40 years, $25,000 will probably have the equivalent purchasing power of $250 today. Try getting excited about living on $250 when you’re old.

To me, it’s better to inform people about who pays taxes and who (legally) doesn’t pay taxes. If you can minimize taxes or avoid paying them altogether (again, legally), you can make a lot more money today instead of having to wait, with your fingers crossed, for 40 years.

Playing by the Rules of the Rich

Years ago, my rich coach told me, “When it comes to taxes, the rich make the rules.” He also said, “If you want to be rich, you need to play by the rules of the rich.” The rules of money are skewed in favor of the rich, and against the working and middle classes. After all, someone has to pay taxes.

There are many ways that the rich make a lot of money and pay little to no money in taxes, and anyone can use them. As an illustration, here’s a real-life situation in which I played by the rules of the rich and minimized my taxes:

Kim and I are currently investing the $1.2 million in another 350-unit apartment house in Flagstaff, Ariz., a hot property market.

Move Money, Don’t Park It

This is an example of an investment strategy known as the velocity of money. As I’ve written before, moving your money makes more sense than parking it in cash, bonds, equities, or mutual funds — the strategy most financial advisors recommend.

Kim and I have several such scenarios active at any one time. We have lots of monthly cash flow, which we reinvest, but we rarely have any liquid cash sitting around to be taxed.

In the above example, we started with $100,000 we earned tax-deferred from another investment. The $100,000 eventually allowed us to borrow over $20 million from banks, tax-free. How long would it take you to save $20 million by parking your money somewhere, as most financial advisors recommend?

Chipping Away at Taxes

Clearly, one of the reasons the rich get richer is because they earn a lot of money without paying much, if anything, in taxes. They know how to use banks’ tax-free money to become richer.

Anyone can do the same. For instance, instead of paying capital gains tax on the sale of our condo units, real estate laws allowed us to defer paying these taxes and invest them into another property instead. The cash that does come from this property goes into our pockets at a lower tax rate because there’s no Social Security or self-employment tax to pay, and the tax rate is further reduced by the depreciation of the property.

On the flip side, the poor and middle class toil away for their money, pay more in taxes the more they earn, and then park their earnings in savings and/or retirement accounts. In the meantime, they receive little or no cash flow on which to live while waiting for retirement — when they’ll live on their meager savings.

Doesn’t it make more sense to play by the rules of the rich, and earn more while paying less in taxes?

Written by:Robert Kiyosaki

Learning How to Reap the Rewards

Successful entrepreneurs always see opportunity where others don’t. When you look at the rich, they often make their money through real estate investments.

While everyone else is panicking and worried about a market crash, you’ll see entrepreneurs and real estate investors excited and ready to find some deals. This is a great time to be looking for real estate investments.

The tax laws are set up to reward entrepreneurs for stimulating economic growth and employment.

What some people forget is that the tax laws offer benefits to real estate investors who provide housing for employees. It also rewards investment in commercial buildings since the businesses that typically operate out of those buildings stimulate the economy.

Another interesting point of view when it comes to real estate investing is your income. Most people don’t realize that you can actually earn four different types of income through real estate.

• Your tenant’s rent – which we look at as cash flow (income – operating expenses)
• Depreciation – which allows investors to write off the structure and improvements to a property over time
• Amortization – (your tenant paying down your mortgage debt)
• Appreciation (capital gain or increase in value of real estate over time)

The best way to leverage this?

1. Find a building in a good area with job growth.
2. Once you find a good area, pinpoint an underperforming property that you could add value to.

One example I love to share for the latter point is washers and dryers. If I come up on a decent building in a good area that doesn’t have washers or dryers in each unit, I consider making that addition. Why? Because by doing so, it can raise the rents, increase occupancy, and drive higher Net Operating Income (NOI).

This, in turn, increases the overall value of the property. Then I can eventually refinance the property, pay back all my investors, and reinvest that money into a new property.

Now, this is the part that is difficult for some people to understand, but when I buy another property, I’m essentially getting it for free. I will use the equity from our other property to purchase it. And because of the increased operating income of the previous property, we will still have cash flow.

This formula is how my team and I went from owning a handful of small duplexes to building an entire empire worth millions.

I fully believe that anyone can use real estate to accelerate their wealth just like I have. They just have to be willing to take the time to learn. Go out and become a property manager. Learn what it’s like on the ground floor. I believe that immersion is the best way to learn. I believe in it so strongly that I still use it today in my corporate office.

All new employees start out in the field. They manage properties and therefore learn every aspect of the business. We get the best of the best when it comes to our employees because we train them to be the best.

So like I said, if you want to be a real estate investor, immerse yourself in business. Take classes, shadow people in the industry and learn all you can on the ground floor.

Talk to ABG to start your journey leading to your financial freedom.

The 3-step formula successful investors use to get rich in real estate

I’m often asked, “How can I get rich in real estate?”

Behind this question is a different question, “How can I get the money I need to invest in real estate?”

More often than not, the people asking me these questions have had ingrained into them from an early age that saving was a means to getting rich and that if they wanted to invest, they needed to use their own money. Both are myths that I want to discuss as a foundation on how the rich use debt to get rich in real estate—and how you can too.

The myth of savings as a means to get rich

Is there anything more symbolic about teaching kids about money than this image?

Or perhaps if you were of an older generation, you think of this:

There’s no doubt about it, from an early age we teach our children the value of saving money. “A penny saved; a penny earned,” we chime. And when they are a bit older, we spin tales of the magic of compounding interest. Save enough, children are told, and you’ll be a millionaire by the time you’re ready to retire.

Of course, we don’t tell them about historically low interest rates.

Or the power of inflation to eat away at the value of money over time so that being a millionaire is worthless by the time you retire.

Those are inconvenient financial truths.

It seems as if the “wisdom” to save your money is timeless, in that it won’t go away, even though it’s proven to be wrong. Even today you find “financial experts” who push the save to be a millionaire myth.

The myth: You need money to invest in real estate

The other side of the save to get rich myth is that you need to use your own money (and a lot of it) in order to invest. This is a byproduct of the cultural belief that debt is bad and savings is good. Often, people will say that investing in real estate is risky but if you’re going to do it, try to keep your debt as low as possible. Use your own money and pay off the debt as fast as you can. Nothing could be more wrong. And it stems from a fundamental misunderstanding about debt, which can be both good and bad.

Let’s take a moment to define what I mean by bad debt and good debt.

Bad debt is money that takes money out of your pocket. It makes you poorer. This can be credit card debt from purchases for things like clothes or TVs. And it can even be the mortgage for your personal home. In short, if it’s not making you money, it’s bad debt.

Good debt is another story, and most people aren’t even aware that it exists. Good debt puts money in your pocket month in and month out. “How can this be?” you might ask. Glad you asked. Let’s talk about a concept called OPM or Other People’s Money.

How you can use good debt (OPM) to get rich in real estate

Those who are the most successful investing in real estate understand that the best way to get a high return is to have as little of their own money in a deal.

Rich real estate investors spend their time finding the best deals and then present them to other investors who are willing to use their money to fund the deal. When structured right, OPM allows a real estate investor to secure a valuable, high return, cash-flowing asset for little-to-nothing.

As an example, lets talk about Rich Coach advisor Ken McElroy. Ken is a real estate mogul specializing in apartments—a real estate class called multi-family housing.

1. Find a real estate deal with significant upside

What Ken and his partners do is find apartment buildings that underperform. Because the value of a commercial real estate asset like an apartment is based off the Net Operating Income (income after expenses), any opportunity to increase NOI is an opportunity to see a healthy return.

For Ken and his team, a variety of factors could help with this. For instance:

• The current landlord could be renting units well-below market rates. Turning those units and raising the rent could dramatically increase NOI.
• Retrofitting units with washers and dryers, as well as a cosmetic facelift could increase rents by anywhere from $25 to $50 a month. Multiply that by hundreds of units and you’ll see a big lift in your passive income.
• In many markets it was common to pay for utilities as part of the rent. Changes in the market now make it easier to charge tenants for utilities, which is a huge income opportunity.

2. Package the deal and find investors willing to give you money to be part of it

Once they have a solid business plan in place, Ken and his team form a legal entity called an Pty Ltd for the property and create an investor prospectus. They then go out to investors and raise the capital they need to purchase the property (OPM) by selling shares into the Pty Ltd. Once the asset is secured, they execute on their plan, as well as bring their considerable management expertise to the table.

Already, both Ken and his investors enjoy a good return from the property income since they only purchase cash-flowing assets. This can often be in the double digits. But here’s what separates the rich mindset from the poor one.

3. Refinance the property, give the money back, and do it again

Once the property is substantially increased in value from the business plan, say over a course of three years, Ken and his team refinance the property, pay back all the investors their original capital plus a generous return on that capital, and still have ownership in the building that cash flows each month. And the beauty for Ken and his team is they create this wealth with a little bit of their capital and a bunch of capital from other people. So their returns are higher the whole way through.

At this point, Ken and his investors are enjoying income with no money in the deal. That is an infinite return. And that is why debt infinitely trumps savings.

Anyone (including you) can learn how to get rich in real estate

The good news is you can begin to invest like I outlined above. It might not be with large apartment buildings at first, but it can grow into that.

My friend, Kim, invested with OPM for her first investment—a rental house in Portland, OR. Today, she owns thousands of apartment units. She used this method of good debt to increase the velocity of her money from one small house to a huge portfolio. And you can too. It starts with thinking differently about money, increasing your financial intelligence, and getting to work today.

Understanding the true definition is the key to getting rich

A lot of people come to me asking how they can get rich quick. That is the one question that disturbs me the most because it’s the wrong question. It tells me that they don’t have the foundation of financial intelligence required to use their money well if they get rich.

This is because most people don’t understand that, when it comes to being rich, it’s not about how much money you make. It’s about how much money you keep.

Want to be rich? It’s about assets vs. liabilities

My school teacher always told me, “You need to read books.” My rich coach always told me, “You need to be financially literate.” I believe both were right. Books and learning are important, and so is a strong financial education. And if I had to choose one over the other, I’d choose financial education.

The importance of a firm, financial foundation makes sense when you think of construction. If you want to build the Empire State Building, the first thing you do is dig a deep hole and pour a strong foundation. If you want to build a McMansion in the suburbs, you pour a six-inch slab.

The problem with most people who want to get rich quick is that they’re trying to build the Empire State Building on a six-inch slab of concrete. They haven’t gone deep. They don’t have a firm, financial education to shore up their financial foundation. Thankfully, my rich coach took the time to teach me about money and poured a strong, financial foundation for my life.

And the number one rule he taught me was: “You must learn the difference between an asset and a liability—and buy assets.”

It’s so simple a rule that it’s almost anti-climactic. But, if you want to be rich, this is all you need to know. It’s rule number one. It’s the only rule.

The reality is that most people struggle financially because they don’t know the difference between an asset and a liability. Partly, this is because schools don’t teach people what an asset and a liability is. And partly, this is because those who do learn the concepts learn them from accountants who make them much too complicated.

My rich coach gave me a very simple definition of an asset and a liability.

What is an asset?

The simple definition of an asset is something that puts money in your pocket. Many so-called experts on money and accountants will have a much different definition that involves complex mathematics, but the reality is that unless something is putting money in your pocket, it’s not an asset.

There are many things that can be considered assets. These include things like investment real estate, a business, products like books or art, or the dividends from stock and bond investments.

Rich people focus on building their assets.

What is a liability?

The simple definition of a liability is something that takes money out of your pocket. Common liabilities include things like cars, vacations, clothes, eating out, unused subscriptions, and more.

If you look at the budget of a poor person, you’ll see that it is full of liabilities and has no assets.

The interesting thing is that there are some things that people mistake as assets that are really liabilities. This is because they don’t have high financial intelligence and they take at face value the advice of so-called financial experts.

The difference between an asset and a liability

To illustrate this, let’s look at something most people view as an asset—their home. If you look a traditional balance sheet, your house will be listed in the asset column.

I’ve stirred controversy by saying, “You house is not an asset.” In 2008, the start of the Great Recession, caused by massive defaults on sub-prime home loans, people weren’t laughing any more.

Why was this?

It was because they realized the hard truth that many things that are considered assets by accountants and finance people are really liabilities hiding behind smoke and mirrors.

Let’s revisit the Rich Coach simple definition of an asset and a liability: an asset is something that puts money in your pocket and a liability is something that takes money out of your pocket.

Using this simple and practical definition, your home is a liability because it takes money out of your pocket each month in the form of a mortgage, taxes, insurance, and maintenance costs. It does not put money in your pocket. Only if you’re able to sell it at a profit does it become an asset. Many people impacted by the Great Recession discovered that their house was a liability when they were foreclosed, sold on a short sale, or sold at a loss.

Conversely, a rental house can be an asset, if you do your due diligence correctly and are able to collect more rent than you have costs each month. The difference between the rent and the expenses is the net operating income, and it is cash flow that flows into your pockets each month. Therefore, it is an asset.

The rich don’t work for money

I find the difference between an asset and a liability is best understood by looking at the following pictures.

What is cash flow? The answer will relieve your stress about money and provide an ongoing stream of income

Do you ever worry about your financial future? Perhaps you’re even worrying about your financial present. According to a study by Lexington Law, 26% of Americans are worried about spending more than they earn this year. Another study shows that two-thirds of Americans would struggle to come up with $1,000 in case of emergency. And yet another survey shows that 25% of Americans are worried about running out of money during retirement.

What do all these statistics have in common? That the vast majority of Americans have no idea how to achieve financial independence. They work their butts off, live paycheck to paycheck, rack up credit card debt, and don’t have any savings to speak of. This is a scary position to be in

So how did we turn things around? Through the power of a magical concept called cash flow.

What is cash flow?

In the world of investing, there are primarily two things people invest for: capital gains and cash flow. What’s the difference?

• Capital gains
  Capital gains is the one-time profit you make on the sale of an investment.
  For example, you buy 5 shares of a stock for a total of $100. Those shares go up in value to $150. You decide to sell your shares. The $50 profit you make from the sale of your shares is capital gains. The same applies to real estate. You buy a house for $100,000. You fix it up and sell it for $140,000. Your $40,000 profit when you sell the house is capital gains. Now, here’s the kicker: In order to realize capital gains, you must sell the asset. You can also have a capital loss if you lose money on the sale of the asset. A capital gains strategy assumes an appreciating, or up-trending, market. In order for you to make a profit the asset has to go up in value. Someone must pay you more than what you paid for it.
• Cash flow
  Cash Flow is an ongoing stream of income you receive from an investment. You may receive this money on a monthly, quarterly or annual basis, depending on the investment. The strategy behind cash flow is to buy and hold, whereas the strategy behind capital gains is to buy and sell.So, let’s say you buy a stock that pays you a dividend every year. That dividend is cash flow. You loan money to a new start-up business. Each month the business pays you interest on your loan. That interest is cash flow.

Why is cash flow the way to go?

Cash flow investing is what most buy-and-hold real estate investors are after. For example, you buy a six-unit apartment building and you rent out each of the units. Every month you collect the rent, pay the operating expenses and the mortgage, and, if you’ve managed the property well, you end up with positive cash flow. Is it possible to have a negative cash flow? Absolutely. That’s why having a strong financial foundation is so important, so that the investments you make generate positive cash flow.

So why does cash flow investing get me so excited? Because it has numerous advantages, including creating:

1. Financial freedom

One of the beautiful things about the financial independence is that you do not need to acquire hundreds of thousands, or even millions of dollars in savings — yet, this is what most people think of when they talk about being financially free and never having to work again. Instead, you simply need to build up your monthly cash flow to be greater than your living expenses. Once your life is no longer dictated by the constraints of money, your time is freed up to do whatever brings you joy.

2. Carefree retirement

One more advantage of focusing on cash flow is that it eliminates the fear of running out of money. One concern I hear from people who have retired is, “I’m worried I’m going to outlive my retirement account.” By accumulating assets that provide a monthly cash flow, money comes in every month until you decide to sell the asset(s).

3. Control

I don’t like to invest in things where I have no control, especially when it comes to my money. That’s why I’m not a stock trader or a house flipper — I’m not god at timing the highs and lows of the stock market or real estate market and don’t like the pressure. With cash-flow investing, my success is not dictated by the daily fluctuations of the market. I cannot control the markets, but I can control my rental properties/business.

How to start cash flowing

My friend Kim, her first cash-flow investment was a small two-bedroom, one-bath house in Portland, Oregon, in 1989. Her monthly cash flow averaged a whopping $50 per month. No, it wasn’t a lot, but it was a start. She looked at that $50 as much more than a few extra bucks in her pocket — to her, it was the first building block toward the cash flow she enjoy today. There comes a point in your investing life where cash flow from your investments supports not only your living expenses, but also your next investments. Essentially, cash flow breeds new assets, which, in turn, breed more cash flow. See how the cycle works?

Her goal at the time was to acquire two rental units per year for 10 years. At the end of the decade, She’d have 20 units, all cash flowing. And guess what? It didn’t take me 10 years to reach that goal — it only took 18 months. Of course, that just led to her setting my next, more aggressive goal. And so on.

When she and her husband Robert “retired” in 1994, they did not have millions stashed aside. What they had was $10,000 in cash flow coming in every month from our investments, primarily real estate. The beauty was that their living expenses were only $3,000 per month. At that point they were financially free. The cash flow from their investments was more than paying for all of our living expenses.

So, what is cash flow for you?

What kind of life do you envision for yourself? And what about your future? If money is something that’s a constant source of stress for you and your family, then cash flow may bring the peace of mind that you’re looking for.

Contact ABG to find out how to start your first step to achieve your financial freedom.